Nestle (Malaysia) Bhd
(March 3, RM76.20)
Maintain hold with unchanged target price (TP) of RM78.00: There could be some headwinds ahead, given the uptick in raw material costs. However, we sense that Nestle (Malaysia) Bhd has room for efficiency gains or that it could pass such cost increases through to consumers. Growing export sales could also act as a buffer. Nestle is fairly valued now, in our view, trading at 27.9 times its price-earnings ratio (PER), in line with its five-year mean. Our discounted cash flow TP (DCF-TP) is unchanged at RM78.00. Full-year estimated (FY17E) dividend yield of 3.6% for 2017 should provide support to share price. 

Management clarified at its analyst briefing that the weaker fourth quarter (4Q16) was partly due to the phasing of A&P activities due to early Chinese New Year. Weaker gross profit margins were largely due to higher raw material costs. Also, Nestle has indicated that there is still some room for efficiency gains and that it might only make minor tweaks to selling prices in the medium term. Note that it has largely maintained its selling prices since the second quarter of 2015 (2Q15) and was able to maintain its market share in the full year 2016 (FY16). 

Management started the briefing with a presentation of its e-commerce involvement. We note that e-commerce in FY16 accounted for only 0.3% of its domestic revenue at RM11 million. The target for FY17 would be to triple it to RM30 million. Nestle will also rely on existing online platforms and has no plans to take on back-end services for now. 

We maintain our earnings forecasts. Valuation-wise, we believe that Nestle is trading fair at 27.9 times PER, in line with its five-year mean of 27.9 times PER. Our DCF-TP of RM78.00 assumes 7.2% weighted average cost of capital, and 1.5% long-term growth. — Maybank Kim Eng, March 2