Oil breaks US$100, Wall Street retreats and bond yields rise, inflation is becoming the market’s biggest risk again Global markets are starting Thursday in a more defensive position. Brent crude has broken above US$100 a barrel , U.S. Treasury yields are pushing higher, and Wall Street fell for a third straight session as investors reassess whether central banks may need to keep tightening rather than easing. For Malaysian investors, the key chain today is increasingly clear: Oil → inflation → interest rates → bond yields → USD/MYR → Bursa valuations. 30-second market snapshot Market / Asset Latest 🇺🇸 S&P 500 7,636.36, -0.48% 🇺🇸 Dow Jones 52,380.66, -0.77% 🇺🇸 Nasdaq 26,253.34, -0.64% 🇲🇾 FBM KLCI 1,714.34, virtually flat 💵 USD/MYR ~4.06 🇺🇸 U.S. 10Y Treasury ~4.84% 🇺🇸 U.S. 2Y Treasury ~4.42% 🥇 Gold ~US$4,396/oz 🛢️ Brent crude US$101.21/bbl 🛢️ WTI crude US$96.05/bbl ₿ Bitcoin ~US$79,300 🇯🇵 Nikkei ~64,760, -0.6% this morning Brent jumped about 3.4% Wednesda...
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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