Maintain HOLD but with a higher DCF-TP of MYR78

Into 2H16, domestic sales should continue to pick up on gradual normalisation of consumer demand. Export sales should also post healthy growth on new product launches to neighbouring countries, partly supported by its halal status which is one the drivers of growth. Valuation wise, NESZ is trading fair now, about in line with its 5-year mean. We have tweaked our earnings forecasts by +2% p.a. for FY16-18, on lower raw material costs and tax rates, resulting in a higher TP by 1%.

Domestic sales up mainly on higher volumes

NESZ clarified at yesterday’s briefing that its 2Q16 domestic sales growth

(+6% YoY; 79% of total revenue) was mainly driven by volumes and in turn, A&P efforts. To note that 2Q15 (a post GST implementation quarter) was also of a lower base. As for 2Q16 export sales (21% of total revenue), the solid sales growth of +18% YoY was mainly due to higher sales of noodle, coffee and confectionary to neighbouring countries. All in, overall 2Q16 sales was up a healthy +8.2% YoY.

To maintain product prices in the near term

Being a beneficiary of overall lower raw material prices, NESZ will look to maintain its product prices in the near term. Coupled with improved production and supply chain efficiencies, we understand that NESZ has been able to largely maintain its product prices since 2Q15. On taxes, the lower tax rate in 1H16 (18.1%; -4.7ppt YoY) was largely due to halal incentives and capital allowances, the latter from its heavy capex in FY15 (MYR191m). We expect capex to normalize to MYR103m for FY16 before picking up again into FY17 and FY18.

Raising our net profit forecasts by +2% for FY16-18

On the back of lower raw material costs, tax rates and upon tweaking our capex assumptions, we revise our net profit forecasts upwards by 2.0%/1.9%/1.8% for FY16/17/18. This led to a marginally higher DCF-TP of MYR78.00 (+60sen/+1%; 7.0% WACC and 1.5% long term growth).

Source: Maybank Research - 30 Aug 2016