NESTLE (4707) : Affin Hwang Investment Bank Research
Nestle (Malaysia) Bhd
(Dec 15, RM68)
Maintain “add” and raise target price (TP) to RM75.00. We are positive on Nestle’s prospects as we believe that it will continue to register sturdy growth amid weaker consumer spending and higher cost of living due to: i) resilient demand for its products, which are seen as basic necessities; ii) a strong brand name; and iii) solid fundamentals.
Over the past 12 months, we have seen a quick succession of subsidy rollbacks in the form of fuel price hikes (in October), increased electricity tariff rates, higher natural gas prices and the removal of the sugar subsidy. These rollbacks have squeezed consumers’ pocketbooks and decreased their spending power.
Although year-to-date earnin gs declined marginally year-on-year (y-o-y) in first half of 2014 (1H14) due to higher operating expenses, the group’s third quarter of financial year ending Dec 31, 2014 (3QFY14) bottom line saw strong growth of 9.9% y-o-y despite weaker consumer spending.
We expect the group to continue to post healthy sales and earnings growth.
As commodity prices have softened in 2H14, we expect the cost of raw materials to remain favourable for the rest of 2014 and into 2015, supporting the group’s earnings.
Thus, while we forecast a gross-profit (GP) margin improvement to 37.9% in 2015 (9M14:35.7%), we trim our 2014 to 2016 earnings per share forecasts by 1.1% to 1.8% as a result of higher capex.
Even though we are trimming our net-profit forecasts, we lower our beta assumption and increase our terminal growth assumption to 3.5% (from 3%) for Nestle, as our previous assumptions were too conservative.
Thus, we increase our 12-month dividend discount model-derived TP to RM75.00 (from RM72.05), valuing Nestle at an implied 27.1 times of 2015 price-earnings ratio (+1 standard deviation of its five-year historical mean).
Besides strong fundamentals and brand name, we believe this is fair in view of Nestle’s solid earnings with a 10-year compounded annual growth rate of 10.2%; and strong product mix made up of non-discretionary products which should be more resistant to weaker consumer spending. — Affin Hwang Investment Bank Research, Dec 15
http://www.theedgemarkets.com
Nestle (Malaysia) Bhd
(Dec 15, RM68)
Maintain “add” and raise target price (TP) to RM75.00. We are positive on Nestle’s prospects as we believe that it will continue to register sturdy growth amid weaker consumer spending and higher cost of living due to: i) resilient demand for its products, which are seen as basic necessities; ii) a strong brand name; and iii) solid fundamentals.
Over the past 12 months, we have seen a quick succession of subsidy rollbacks in the form of fuel price hikes (in October), increased electricity tariff rates, higher natural gas prices and the removal of the sugar subsidy. These rollbacks have squeezed consumers’ pocketbooks and decreased their spending power.
Although year-to-date earnin gs declined marginally year-on-year (y-o-y) in first half of 2014 (1H14) due to higher operating expenses, the group’s third quarter of financial year ending Dec 31, 2014 (3QFY14) bottom line saw strong growth of 9.9% y-o-y despite weaker consumer spending.
We expect the group to continue to post healthy sales and earnings growth.
As commodity prices have softened in 2H14, we expect the cost of raw materials to remain favourable for the rest of 2014 and into 2015, supporting the group’s earnings.
Thus, while we forecast a gross-profit (GP) margin improvement to 37.9% in 2015 (9M14:35.7%), we trim our 2014 to 2016 earnings per share forecasts by 1.1% to 1.8% as a result of higher capex.
Even though we are trimming our net-profit forecasts, we lower our beta assumption and increase our terminal growth assumption to 3.5% (from 3%) for Nestle, as our previous assumptions were too conservative.
Thus, we increase our 12-month dividend discount model-derived TP to RM75.00 (from RM72.05), valuing Nestle at an implied 27.1 times of 2015 price-earnings ratio (+1 standard deviation of its five-year historical mean).
Besides strong fundamentals and brand name, we believe this is fair in view of Nestle’s solid earnings with a 10-year compounded annual growth rate of 10.2%; and strong product mix made up of non-discretionary products which should be more resistant to weaker consumer spending. — Affin Hwang Investment Bank Research, Dec 15
http://www.theedgemarkets.com
