Iran has warned global markets to prepare for oil at US$200 per barrel , escalating rhetoric as attacks intensify and shipping through the Strait of Hormuz remains effectively frozen. While oil prices have retreated from recent highs near US$120, Tehran’s message underscores the growing risk of a prolonged energy shock. Key Takeaways Iran warns oil could surge to US$200 per barrel Strait of Hormuz remains blocked, disrupting 20% of global oil flows 14 merchant ships reportedly struck since conflict began IEA expected to propose record 400 million-barrel reserve release Markets currently betting conflict may be contained Oil Market on Edge Iran’s military command said oil prices depend on regional security — warning the world to prepare for US$200 crude if instability persists. The Strait of Hormuz, a narrow chokepoint along Iran’s coast, normally handles: About 20% of global oil shipments A significant share of global LNG trade So far: At least 14 ships have reportedly been struck...
Retain HOLD call with a higher target price (TP) of RM85.73
Highlights
- We attended Nestle’s 1Q17 briefing and came away feeling neutral on the company’s prospects going forward.
- Nestle anticipates half of revenue growth in FY17 will be driven by new product launches, in particular, the launch of new varieties of KitKat chocolates.
- We share management’s optimism on its new KitKat products, given: (1) its lion share in Malaysia’s chocolate product market which market share has grown from 14.4% in 2013 to 16.8% in 2016 (and overtook Cadbury as Malaysia’s most popular chocolate); (2) Majority of Malaysian consumers (two-third, according to a Nielsen report) prefer new and innovative products from brands that are familiar to them.
- Additionally, we believe that the launch of the Kit Kat confectionary store in Mid Valley in late-2016 (where consumers can customize KitKat chocolate bars with up to 10,000 combinations) will serve as its marketing base (apart from allowing Nestle to sell premium KitKat products at higher margins). The buzz generated by the store and custom made KitKats via social media posts are expected to have an influential effect with 40% of Malaysian consumers citing social media posts as a source of new products. (Nielsen)
- Product launches in 1QFY17: MET KOOL Panda, Nescafe GOLD Creamy Latte and Dark Latte, MAGGI Hot Mealz, MAGGI Roasted Sesame Chicken Noodles and KIT KAT Mini.
- Prospects: We believe the group will carry out its Fuel, Innovate, Transform (FIT) strategy by continuing to innovate its product brands, and enhance efficiencies in its factories and supply chain processes. In doing so, Nestle aims to mitigate higher input costs going forward, particularly from milk powder and sugar.
Risks
- Prolonged depression in consumer sentiments; strong competition especially in the instant coffee segment; potential failure in quality control.
Forecasts
- Maintained, as our forecasts have already reflected the contribution of new products.
Rating
HOLD ↔
- We believe Nestle warrants a HOLD call as it is fully valued at the current price despite organic growth prospects going forward. Investors should have Nestle in their portfolio on the back of its defensive nature and as a proxy to Malaysia’s recovery in consumption growth.
Valuation
- Maintain our HOLD call with a higher TP of RM85.73 (from RM81.20) based on DDM (WACC: 7.8%; TG: 3%) after rolling over our DDM valuation forward.
Source: Hong Leong Investment Bank Research - 27 April 2017
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