Stock Name: NESTLE
Company Name: NESTLE (M) BHD
Research House: MAYBANK
Nestle (Malaysia) Bhd
(Sept 7, RM41.20)
Maintain buy at RM41 with target price of RM43.86: While Nestle's lack of trading liquidity is lamentable, investors should also take notice that similar, if not more attractive, growth opportunities elsewhere in the consumer sector will abound if prospects are as rosy for this large-cap consumer sector bellwether.
We reiterate our "buy" call and discounted cash-flow (DCF)-based RM43.86 target price on earnings growth of 10% to 14% per year in 2010 to 2012.
As our market-contrarian pick, Nestle is already 3% higher after just five working days of trading. Allied to its high quality earnings, an upward re-rating on Nestle's earnings growth potential is certain to excite investors who can accept the lack of trading liquidity in the shares.
Both export and local sales returned to positive growth territory in the 12-month period up to 2QFY2010. For export sales especially, it was the first positive growth registered since 2QFY2009, when the impact of the global recession coincided with the unveiling of new export capacity. Since 2002, Nestle's export sales accounted for 14.9% to 22.3% of total sales in the first six months of each year.
Recall that a key reason for the general lack of enthusiasm over Nestle was its inability to translate over RM500 million in capex spent over 2007 to 2009 into increased export sales in 2009. The quick recovery in export sales in 1HFY2010, however, resulted in its highest ever contribution to Nestle's 1H sales with a contribution of 23.6%, an increase of 1.3% points or RM55.6 million.
A focal point of Nestle's exports continues to be in neighbouring Asean. The favourable general economy in Indonesia, Philippines, Thailand and Singapore (in descending order of population size) point to bright prospects for exports in the forecast period.
Nestle's ready-to-drink (RTD) Milo and Nescafe lines, and its regional soluble coffee plant (upgraded at a cost of RM110 million) have been especially busy. Added capacity at the latter also enabled the entry of a plethora of premixes such as Nescafe Tarik and Nescafe Ipoh White Coffee which have refreshed its line-up in the local sales channel. There is yet more room for growth in beverages.
We notice that non-raw materials expenses ballooned in 2HFY2009 and 1HFY2010, perhaps as Nestle intensified advertising or trade marketing. This affords Nestle nearly RM200 million more in spending efficiency over 2HFY2010 to match 1HFY2010's record net profit of RM239 million.
Further, Nestle's tax rate of 20% in 2009 and 17% in 1HFY2010 is guided to be sustainable, but this is not reflected in our forecasts yet. - Maybank IB Research, Sept 7
This article appeared in The Edge Financial Daily, September 8 2010.
Company Name: NESTLE (M) BHD
Research House: MAYBANK
Nestle (Malaysia) Bhd
(Sept 7, RM41.20)
Maintain buy at RM41 with target price of RM43.86: While Nestle's lack of trading liquidity is lamentable, investors should also take notice that similar, if not more attractive, growth opportunities elsewhere in the consumer sector will abound if prospects are as rosy for this large-cap consumer sector bellwether.
We reiterate our "buy" call and discounted cash-flow (DCF)-based RM43.86 target price on earnings growth of 10% to 14% per year in 2010 to 2012.
As our market-contrarian pick, Nestle is already 3% higher after just five working days of trading. Allied to its high quality earnings, an upward re-rating on Nestle's earnings growth potential is certain to excite investors who can accept the lack of trading liquidity in the shares.
Both export and local sales returned to positive growth territory in the 12-month period up to 2QFY2010. For export sales especially, it was the first positive growth registered since 2QFY2009, when the impact of the global recession coincided with the unveiling of new export capacity. Since 2002, Nestle's export sales accounted for 14.9% to 22.3% of total sales in the first six months of each year.
Recall that a key reason for the general lack of enthusiasm over Nestle was its inability to translate over RM500 million in capex spent over 2007 to 2009 into increased export sales in 2009. The quick recovery in export sales in 1HFY2010, however, resulted in its highest ever contribution to Nestle's 1H sales with a contribution of 23.6%, an increase of 1.3% points or RM55.6 million.
A focal point of Nestle's exports continues to be in neighbouring Asean. The favourable general economy in Indonesia, Philippines, Thailand and Singapore (in descending order of population size) point to bright prospects for exports in the forecast period.
Nestle's ready-to-drink (RTD) Milo and Nescafe lines, and its regional soluble coffee plant (upgraded at a cost of RM110 million) have been especially busy. Added capacity at the latter also enabled the entry of a plethora of premixes such as Nescafe Tarik and Nescafe Ipoh White Coffee which have refreshed its line-up in the local sales channel. There is yet more room for growth in beverages.
We notice that non-raw materials expenses ballooned in 2HFY2009 and 1HFY2010, perhaps as Nestle intensified advertising or trade marketing. This affords Nestle nearly RM200 million more in spending efficiency over 2HFY2010 to match 1HFY2010's record net profit of RM239 million.
Further, Nestle's tax rate of 20% in 2009 and 17% in 1HFY2010 is guided to be sustainable, but this is not reflected in our forecasts yet. - Maybank IB Research, Sept 7
This article appeared in The Edge Financial Daily, September 8 2010.
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