Nestle (Malaysia) Bhd
(Aug 11, RM83.98)
Maintain market perform with an unchanged target price (TP) of RM83.90: We attended a presentation by the head of innovation for Nestle on global food innovation and trends during the Malaysian International Food & Beverage Trade Fair (MIFB 2017 Trade Fair) held from last Wednesday to last Friday. We came away feeling reassured on their constant efforts in product development to cater to the evolving consumer appetite. While challenges remain due to tepid consumer sentiment, we believe Nestle is strongly positioned to leverage on a recovery from targeting the right avenues.

While poor consumer sentiment may be the direct threat to the spending habits of general consumers, the speaker attributed the indirect shift in demand towards evolving trends and habits which divert consumers away from conventional products. Examples of such trends are the emerging popularity of food trucks and themed cafes, increasing availability of convenience goods and adoption of more health-conscious eating habits.

Since 2015, Nestle has been exploring utilising e-commerce portals such as Lazada and 11th Street, as new and effective ways to enable convenient access to group products by consumers. This allows the group to tap into large multi-brand campaigns to motivate larger purchase volumes from consumers at a lower average price.

We believe the benefits further extend to serve as a cheaper marketing platform to introduce new product variants given the high utilisation of these channels.

While high prices are known to negatively affect purchase decisions, premium-priced products justified by better quality could be well received as well. Premium products with improved nutritional values and flavours catering to niche tastes could be favoured editions of the group’s product portfolio. New products include the first Maggi Oat Noodles and the selling of customisable Kit Kat chocolates in the recently established Chocolatory.

We feel reassured with the group’s position as the market leader in food and beverages. The group’s strategy to emphasise product innovation sits well with the current market landscape where demand can be driven by global fads, regulatory changes and shifts in festive seasons, particularly within the country.

We believe the introduction of premium products could also better position the group to ride against the constant volatility in commodity prices without resorting to price increases with their higher margin levels. Further, with strong innovation capabilities, the group could cater to more niche customers that have not been tapped by market players. Though possibly on a narrower base from the broader consumer market, capturing a loyal clientele could nonetheless strengthen the relevance of the group’s brand despite a soft economic environment.

Reiterate “market perform” call with an unchanged TP of RM83.90. Our valuation is based on an unchanged price-earnings ratio (PER) of 28 times on the financial year 2018 estimated earnings per share in line with the +0.5 standard deviation over its five-year mean PER. We maintain our earnings estimates as we had accounted for the group’s growth potential to be suppressed by the prevailing softness in consumer sentiment, which has lingered below “optimistic” levels since September 2014. However, we do not discount the possibility for a rerating from a sooner-than-expected recovery in statistical readings. — Kenanga Research, Aug 11