Stock Name: NESTLE
Company Name: NESTLE (M) BHD
Research House: CIMB
Nestle (Malaysia) Bhd
(April 22, RM35.36)
Maintain underperform at RM35.18, target price of RM28: On the surface, 1QFY10 was an exceptionally strong quarter as net profit accounted for 37% of our full-year forecast and consensus estimate. But we consider it to be broadly in line with expectations, as earnings in the coming quarters will be weighed down by major marketing campaigns, unlike in 1Q when the focus was on the relocation of the company's HQ from Nestle House to Menara Surian.
The absence of an interim dividend was not a surprise. We maintain our forecasts and target price of RM28 (discounted cash flow at weighted average cost of capital of 9%). While we continue to like Nestle's defensive earnings and reliable dividends, the stock remains an underperform given the potential de-rating catalysts of (1) an upturn in commodity prices; and (2) deceleration of export growth. QSR is our top F&B pick.
1Q revenue rose 4% year-on-year (y-o-y) and crossed the RM1 billion mark, thanks to (1) contributions from new production lines for Nescafe and Coffee-mate; and (2) higher selling prices for Milo products. Exports contributed 23% to revenue as Nestle continued to benefit from the shift of Maggi noodle production from Australia to Malaysia in early FY08.
Particularly outstanding was the improvement in earnings before interest tax, depreciation and amortisation (Ebitda) margin from 16% in 1QFY09 to 20% in 1QFY10 because of less intense marketing. However, marketing expenses will pick up in the coming quarters, potentially reversing the Ebitda margin to around 15%-16%.
Margin pressure could also come from the phenomenal rise of cocoa price. The international price of cocoa now hovers at £2,246/tonne (RM11,065), which is the highest in at least 21 years. The situation has forced Nestle to raise the prices of Milo powder and 3-in-1 mixes by 9% in 1Q. If input prices continue to offset internal initiatives, consumers may have to fork out more for Milo and confectionery this year.
Being Malaysia's biggest F&B producer, Nestle has some pricing power but faces a threat from cheaper alternatives such as hypermarkets' house brands.
In our forecasts, we assume capital expenditure of RM80 million-RM100 million per annum in FY10-FY12. - CIMB Research, April 22
This article appeared in The Edge Financial Daily, April 23, 2010.
Company Name: NESTLE (M) BHD
Research House: CIMB
Nestle (Malaysia) Bhd
(April 22, RM35.36)
Maintain underperform at RM35.18, target price of RM28: On the surface, 1QFY10 was an exceptionally strong quarter as net profit accounted for 37% of our full-year forecast and consensus estimate. But we consider it to be broadly in line with expectations, as earnings in the coming quarters will be weighed down by major marketing campaigns, unlike in 1Q when the focus was on the relocation of the company's HQ from Nestle House to Menara Surian.
The absence of an interim dividend was not a surprise. We maintain our forecasts and target price of RM28 (discounted cash flow at weighted average cost of capital of 9%). While we continue to like Nestle's defensive earnings and reliable dividends, the stock remains an underperform given the potential de-rating catalysts of (1) an upturn in commodity prices; and (2) deceleration of export growth. QSR is our top F&B pick.
1Q revenue rose 4% year-on-year (y-o-y) and crossed the RM1 billion mark, thanks to (1) contributions from new production lines for Nescafe and Coffee-mate; and (2) higher selling prices for Milo products. Exports contributed 23% to revenue as Nestle continued to benefit from the shift of Maggi noodle production from Australia to Malaysia in early FY08.
Particularly outstanding was the improvement in earnings before interest tax, depreciation and amortisation (Ebitda) margin from 16% in 1QFY09 to 20% in 1QFY10 because of less intense marketing. However, marketing expenses will pick up in the coming quarters, potentially reversing the Ebitda margin to around 15%-16%.
Margin pressure could also come from the phenomenal rise of cocoa price. The international price of cocoa now hovers at £2,246/tonne (RM11,065), which is the highest in at least 21 years. The situation has forced Nestle to raise the prices of Milo powder and 3-in-1 mixes by 9% in 1Q. If input prices continue to offset internal initiatives, consumers may have to fork out more for Milo and confectionery this year.
Being Malaysia's biggest F&B producer, Nestle has some pricing power but faces a threat from cheaper alternatives such as hypermarkets' house brands.
In our forecasts, we assume capital expenditure of RM80 million-RM100 million per annum in FY10-FY12. - CIMB Research, April 22
This article appeared in The Edge Financial Daily, April 23, 2010.
No comments:
Post a Comment