Q3CY16 core PAT of R2.93 bn was ahead of our estimates. Net sales growth remains robust, following the success of the Maggi brand relaunch. Higher staff costs and other expenses lead us to tweak our estimates slightly, but we maintain our Hold on the stock.
Results highlights: Net sales growth increase robust on a base which was impacted by the Maggi brand recall. Increase in the other operating income is largely due to timing differences in realisation of export incentives. Increase in other expenses is attributed to rebuilding of the Maggi noodles business. Higher average liquidities were partially offset by lower yields, though still resulting in higher other income.
Change of estimates: We tweak CY16E EPS estimates by c.3% following higher other expenses and staff costs. Our revenue assumptions remain unchanged as the Maggi brand continues to gain market share, as expected. Hence our price target is slightly reduced to R7,390, from R7,400 earlier.
Revenue growth to be driven by innovation: Nestle is witnessing a focus on innovation, brand extensions and launching products from its international stable under the new leadership. Over 25 new products have been launched in the recent past. A rejuvenated focus on volumes is witnessed in the market place. New launches – GrekYo, KitKat Duo, Nescafe Sunrise Instafilter, and new Maggi variants, are getting good initial consumer feedback. Though we are confident that these new initiatives would drive revenue growth, we are conservatively modelling revenue growth of c.8% CAGR over CY14-18e.
Valuation/Risks: We value Nestle using a DCF-based methodology, with a WACC of 10%, earnings CAGR of 21.9% in CY15-18e (Maggi base effect in CY15) and 10.5% from CY18-28e. We assume a perpetual growth rate of 6% thereafter. Risks: Demand weakness and an increase in competitive intensity can put pressure on our earnings estimates.