Results

• Within expectations – Reported FY14 PAT of RM550.4m came in within our expectations but below consensus, accounting for 95.0% and 93.2%, respectively.

Deviation

• None.

Dividends

• Declared final dividend of RM1.75/share, totaling FY14 dividends to RM2.35/share (FY13: RM2.35/share). This represents payout and yield of 100% and 3.2%, respectively.

Highlights

• Although domestic sales have performed fairly well resulted from aggressive marketing and promotional activities, Nestle recorded flattish yoy revenue for FY14 (+0.4%) attributable to the weak export sales to affiliated companies.

• Recall that Philippines and Indonesia have invested in their own local manufacturing plant facilities for products that were previously imported from Malaysia.

• Operating profit margins were slightly compressed as well from the depreciation of MYR against USD in 2HFY14 that more than offset lower commodity prices during the same period. Hence, total costs were slightly higher in FY14. Furthermore, the group has invested more into marketing and promotional activities to boost its domestic sales.

• Going forward, with neutral to slightly negative outlook on the consumer sector for FY15, we believe the group would continue to invest in marketing campaigns in effort to maintain its domestic sales but at the expense of margin.

Risks

• Relatively elastic demand.
• Poor products quality.
• Poor acceptance on newly innovated products.

Forecasts

• As we do not see immediate recovery in consumer sentiment given the bleak consumer sector outlook coupled with the first decline in profit yoy (since FY06), we turned slightly cautious on the group’s domestic sales. As such, we tweaked our FY15-16 EPS lower by 3.3-4.4%.

Rating

SELL Positives

• Strong brand name with market leader status under its leading brands (Milo and Nescafe).
• Sustainable earnings with strong dividend payout.
• Low maintenance capex requirements. Negatives
• Highly competitive market with low barriers of entry.
• Global economic slowdown.
• Unfavourable commodity prices.

Valuation

• Post-earnings revision, target price is reduced to RM62.92 (from RM66.52) based on DDM. We also downgraded our recommendation to SELL.

Source: Hong Leong Investment Bank Research - 24 Feb 2015