28 October 2014 Still resilient Results Note Nestle Malaysia’s 9M14 earnings came in within our and consensus expectations. The good set of results was mainly underpinned by stronger domestic demand and lower raw material costs. In light of softer consumer spending, we believe that Nestle will remain resilient as most of its products are regarded as household necessities. Maintain ADD, with unchanged DDM-derived TP of RM72.05. Results in line Nestle’s 9M14 turnover rose 1.4% yoy to RM3.7bn due to solid domestic demand for its confectionary, chilled dairy products and liquid drinks which registered robust growth. However, exports moderated slightly due to weaker demand from its affiliated companies which have invested in their own local manufacturing facilities. Nestle's 9M14 earnings dipped 2% yoy, dragged down by higher marketing and promotional expenses. Nestle’s 3Q14 sales dropped 8.9% qoq due to lower demand from its affiliated companies. Despite so, the group registered stronger 26.7% qoq earnings growth, underpinned by lower input costs and earlier timing of its marketing activities in 2Q14 and 3Q14. Nestle NESZ MK Sector: Consumer RM68.00 @ 27 Oct 2014 ADD (maintain) Upside 6.0% Price Target: RM72.05 Previous Target: RM72.05 (RM) 70.00 65.00 60.00 55.00 50.00 45.00 Increasing capacity Nestle's new manufacturing plant in Sri Muda, Shah Alam will double the production capacity for its ready-to-drink products such as Milo and Nescafe. Going forward, we believe that this would support the group’s production and earnings as it targets for the new lines to start commercial production by 1H15. Maintain ADD with unchanged TP of RM72.05 With the results in line, we make no change to our earnings forecast and maintain our ADD rating with an unchanged DDM-derived TP of RM72.05. We like the stock given its: i) sturdy market position and strong brand name; and ii) wide selection of products which are deemed as household necessities. This stock offers 4% dividend yields. Key risks to our view include: i) slower-than-expected consumer spending, ii) a spike in raw material costs and iii) increased competition from other F&B producers. Earnings & Valuation Summary FYE Dec 2012 Revenue (RMm) 4556.4 EBITDA (RMm) 758.6 Pretax profit (RMm) 637.7 Net profit (RMm) 505.4 EPS (sen) 215.5 PER (x) 31.4 Core net profit (RMm) 505.4 Core EPS (sen) 215.5 Core EPS growth (%) 18.3 Core PER (x) 31.4 Net DPS (sen) 210.0 Dividend Yield (%) 3.1 EV/EBITDA (x) 21.0 2013 4787.9 843.6 719.1 561.7 239.5 28.3 561.7 239.5 11.2 28.3 235.0 3.5 18.9 Chg in EPS (%) Affin/Consensus (x) 2014E 5184.5 880.5 723.4 593.2 251.9 26.9 593.2 251.9 5.2 26.9 250.0 3.7 18.2 2015E 5591.3 964.2 812.6 650.1 274.9 24.6 650.1 274.9 9.1 24.6 265.0 3.9 16.6 2016E 6035.3 1040.0 891.5 713.2 300.3 22.5 713.2 300.3 9.2 22.5 280.0 4.1 15.3 0.0 1.0 0.0 1.0 0.0 1.0 40.00 35.00 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Price Performance Absolute Rel to KLCI 1M +2.4% +3.5% 3M +1.3% +4.4% 12M -0.3% -0.5% Stock Data Issued shares (m) 234.5 Mkt cap (RMm)/(US$m) 15,946.0/4,866.3 Avg daily vol - 6mth (m) 0.0 52-wk range (RM) 63.50-69.50 Est free float 0.5% BV per share (RM) 2.64 P/BV (x) 25.78 Net cash/ (debt) (RMm) (3Q14) (339.5) ROE (2014F) 73.0% Derivatives Nil Shariah Compliant YES Key Shareholders Nestle SA Landsbanki Securities UK EPF 72.6% 9.8% 9.3% Source: Affin Hwang, Bloomberg Research Team (603) 2145 8158 research@affinhwang.com (for further enquiries, please contact Kristine Wong; (603) 2142 5815, kristine.wong@affinhwang.com) Source: Company, Affin Hwang estimates Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 1 of 3 28 October 2014 Fig 1: Results Comparison FYE Dec (RMm) 3Q14 QoQ % chg YoY % chg 9M14 1,157.3 (8.9) (4.2) 3,700.2 YoY % chg 1.4 (960.61) 196.7 17.0 (13.4) 22.6 4.4ppt (6.4) 8.4 2.0ppt (3099.8) 600.3 1.8 (0.9) 16.2 -0.4ppt Int expense Int and other inc Associates Exceptional items Pretax Tax Tax rate (%) MI Net profit (7.2) 0.2 0.1 0.0 189.8 (39.7) 20.9 0.0 150.1 23.1 (50.1) 84.8 0.0 22.4 8.7 -2.7ppt 0.0 26.7 29.5 (81.7) 8.9 0.0 7.1 (2.4) -2.0ppt 0.0 9.9 (19.6) 2.7 0.2 33.5 (16.6) (32.5) 0.0 (1.8) (1.3) 0.1ppt 0.0 (2.0) EPS (sen) Core net profit 64.0 150.1 26.7 26.7 9.9 9.9 Revenue Op costs EBIT EBIT margin (%) 0.0 583.7 (131.6) 22.5 0.0 452.1 192.8 452.1 Comment 9M14 revenue higher due to stronger domestic demand for its products. 3Q14 fell 9% qoq due to lower demand from its affiliated companies. 9M14 EBIT margins contract slightly yoy due to higher operating costs. 3Q14 EBIT margins expanded on the back of lower raw material costs and a drop in A&P expenses from a high-base 2Q14. 9M14 net profit came within our and consensus expectations at 76% of the fullyear forecasts respectively. (2.0) (2.0) Source: Affin Hwang, Company data Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 2 of 3 28 October 2014 Equity Rating Structure and Definitions BUY Total return is expected to exceed +15% over a 12-month period TRADING BUY (TR Total return is expected to exceed +15% over a 3-month period due to short-term positive development, but fundamentals are not strong enough to warrant a BUY) Buy call. This is to cater to investors who are willing to take on higher risks ADD Total return is expected to be between 0% to +15% over a 12-month period REDUCE Total return is expected to be between 0% to -15% over a 12-month period TRADING SELL (TR SELL) Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but fundamentals are strong enough to avoid a Sell call. This is to cater to investors who are willing to take on higher risks SELL Total return is expected to be below -15% over a 12-month period NOT RATED Affin Investment Bank does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affininvestmentbank.com Email : research@affinhwang.com Tel : + 603 2143 8668 Fax : + 603 2145 3005 Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 3 of 3