After the sharp run in stock price, the current valuation multiple implies long-term annualised earnings growth expectation of c13-14%, which in our view is significantly high if not excessive and limits upside.
Nestle aims to deliver double-digit revenue growth led by volumes as key strategic construct. Maggi has made material progress since re-launch, and product innovation across segment is picking up pace. Valuation builds in rich growth expectation; maintain Hold rating with unchanged TP of R6,800.
Key themes from recent investor day
Strategic direction: Management has a strong focus on volume-led double-digit growth as it asserts that the current environment is quite competitive but also offers long-term growth opportunities. Nestle intends to tap growth opportunities through: (i) increases in penetration and frequency; and (ii) consumer-centric innovation and renovation across categories. Nestle continues to focus on NHW (nutrition, health and wellness), and all product development seems to reflect this as a guiding principle. Nestle intends to premiumise the segments and build capabilities to expand in new categories. The launch of 25 new SKUs is evidence of a renewed sense of energy and execution. (iii) The company is focussing on improving ground execution and expects to benefit from distribution-led gains.
Operational performance: Maggi has made a rapid recovery claiming back 57% of market share. In the near term, demand has been challenging, as performance of the non-Maggi portfolio in 1HCY16 was disappointing. Beverages segment registered a decline in revenue growth, while Chocolates and confectionary, Milk products and Nutrition segment growth was muted. On a comparable basis, both volume and value growth were muted in 1HCY16.
Our view: Nestle’s investment case from here on will be driven by its progress on delivering volume-led growth in other segments as well. We think Nestle, with strong brands and capabilities, has long-term ‘right to win’ in its core segments. The pace of execution in non-Maggi portfolio will remain the main catalyst for the stock price, in our view.
We retain Hold rating
After the sharp run in stock price, the current valuation multiple implies long-term annualised earnings growth expectation of c13-14%, which in our view is significantly high if not excessive and limits upside. The near-term outlook for earnings now appears solid as last year’s base is quite benign (due to the Maggi ban), which should lead to strong earnings growth.
We have marginally revised estimates as we keep CY16-17e earnings estimates largely unchanged while we lower CY18e earnings estimates by c2%.