Stock Name: NESTLE
Company Name: NESTLE (M) BHD
Research House: CIMB
Nestle (Malaysia) Bhd
(Sept 2, RM40.48)
Maintain underperform at RM40.10 with target price RM28: Liquid drinks took centre stage at Wednesday's analyst briefing. This business was one of the star performers in 2Q, supporting Nestle's 17% year-on-year net profit growth. But the tone of the briefing was cautious as management talked about the price crunch from key commodities, especially cocoa which leapt to a 33-year high in July.
Having raised prices for Milo powder and 3-in-1 mixes by 9% in February, Nestle may not be able to increase prices again this year, putting margins at risk. We maintain our earnings forecasts and discounted cash flow-based target price of RM28.00 (9% WACC). With PERs at a demanding 24 to 26 times, Nestle remains an 'underperform'. The potential de-rating catalysts are: (i) a further upturn in commodity prices; and (ii) deceleration of export growth. We advise investors to switch to our top F&B pick, QSR Brands.
To recap, 2Q net profit jumped 17% y-o-y to RM100 million as revenue stayed above the RM1 billion mark for the second consecutive quarter. Domestic and export sales fared well. Exports have been encouraging as Nestle is riding on both its status as the Nestle group's global halal hub and the economic recovery in Asean. Furthermore, most product categories are growing, particularly liquid drinks and chilled dairy operations. Liquid drinks include Milo (in cans and Tetrapak), Nescafe (in Tetra-Pak), Omega (in Tetra-Pak) and Nesvita (in Tetra-Pak) which are produced at the Shah Alam and Batu Gajah plants.
An aggressive distribution push is a major driving factor. To make the products more accessible, the new business manager's team has been active in securing new accounts beyond the hypermarkets, supermarkets and mom-and-pop outlets. Currently, the distribution network includes less fancy sales channels such as snooker centres, fruit stalls and newspaper kiosks. A wider retail reach has helped liquid Milo and Nescafe to lead their respective markets. Milo (in cans) commands more than 90% of the cocoa liquid drinks market, with competition coming from Power Root's Oligo Cocoa which is marketed by Natural Bio Resources. Nescafe (in cans) commands more than 50% of the coffee liquid drinks market. Among its competitors are Pokka and C I Holdings' Boss. A recent launch of Nescafe Ipoh White Coffee (in cans) has been well received. The brisk sales enjoyed by liquid Milo and Nescafe helped to push the revenue contribution from beverages from 47.9% in FY2009 to 49.3% in 1H2010.
The liquid drinks team is now courting new consumers ' young adults at colleges. This is a smart strategy as demand for carbonated drinks is slowing with the rise of health consciousness. To make the products more relevant to the target crowd, a Facebook page and attractive contests have been put in place.
In FY2008, F&B producers faced a steep increase in the prices of soft commodities. Consequently, Nestle raised the prices of Nescafe and Maggi by 8% to10% in July 2008. The softening of the commodity prices later prompted the company to reduce the prices of Milo and milk products by 7% to 12% in February 2009, its first price-cutting exercise in six years. But crop prices reversed to higher levels earlier this year. In February, Nestle hiked the prices of Milo powder and 3-in-1 mixes by 9%.
Wildfires in Russia have caused wheat and other produce prices to shoot up. Cocoa prices reached a 33-year high in July, helped along by speculative activities. Costs for powdered wheat, cocoa, milk, coffee and wheat have risen at double-digit rates over the past few months. Nestle, like most F&B producers, is accustomed to commodity fluctuations and is therefore planning accordingly. At the briefing, management assured us that there are no plans for now to make consumers fork out more for Nestle products. We believe the company is monitoring a possible pricing action by its competitors. While it is true that it has some pricing power, consumers are shopping harder for deals, choosing more store-brand products and keeping an eye out for discounts.
FY2009's RM267 million record capex for new production lines for Nescafe and Coffeemate and the aggressive distribution drive for liquid drinks prove that Nestle has been increasing its investment in its brands. However, input costs are going up and the price pressure, especially from commodities, could pinch margins. While we continue to like Nestle's huge consumer base and reliable dividends, there is no mistaking management's cautious tone at Wednesday's briefing. Furthermore, the stock is the most expensive in our Malaysian F&B portfolio, trading at 24 to 26 times PER despite offering a bite-sized three-year EPS CAGR of 5.2%. ' CIMB Research, Sept 2
This article appeared in The Edge Financial Daily, September 3 2010.
Company Name: NESTLE (M) BHD
Research House: CIMB
Nestle (Malaysia) Bhd
(Sept 2, RM40.48)
Maintain underperform at RM40.10 with target price RM28: Liquid drinks took centre stage at Wednesday's analyst briefing. This business was one of the star performers in 2Q, supporting Nestle's 17% year-on-year net profit growth. But the tone of the briefing was cautious as management talked about the price crunch from key commodities, especially cocoa which leapt to a 33-year high in July.
Having raised prices for Milo powder and 3-in-1 mixes by 9% in February, Nestle may not be able to increase prices again this year, putting margins at risk. We maintain our earnings forecasts and discounted cash flow-based target price of RM28.00 (9% WACC). With PERs at a demanding 24 to 26 times, Nestle remains an 'underperform'. The potential de-rating catalysts are: (i) a further upturn in commodity prices; and (ii) deceleration of export growth. We advise investors to switch to our top F&B pick, QSR Brands.
To recap, 2Q net profit jumped 17% y-o-y to RM100 million as revenue stayed above the RM1 billion mark for the second consecutive quarter. Domestic and export sales fared well. Exports have been encouraging as Nestle is riding on both its status as the Nestle group's global halal hub and the economic recovery in Asean. Furthermore, most product categories are growing, particularly liquid drinks and chilled dairy operations. Liquid drinks include Milo (in cans and Tetrapak), Nescafe (in Tetra-Pak), Omega (in Tetra-Pak) and Nesvita (in Tetra-Pak) which are produced at the Shah Alam and Batu Gajah plants.
An aggressive distribution push is a major driving factor. To make the products more accessible, the new business manager's team has been active in securing new accounts beyond the hypermarkets, supermarkets and mom-and-pop outlets. Currently, the distribution network includes less fancy sales channels such as snooker centres, fruit stalls and newspaper kiosks. A wider retail reach has helped liquid Milo and Nescafe to lead their respective markets. Milo (in cans) commands more than 90% of the cocoa liquid drinks market, with competition coming from Power Root's Oligo Cocoa which is marketed by Natural Bio Resources. Nescafe (in cans) commands more than 50% of the coffee liquid drinks market. Among its competitors are Pokka and C I Holdings' Boss. A recent launch of Nescafe Ipoh White Coffee (in cans) has been well received. The brisk sales enjoyed by liquid Milo and Nescafe helped to push the revenue contribution from beverages from 47.9% in FY2009 to 49.3% in 1H2010.
The liquid drinks team is now courting new consumers ' young adults at colleges. This is a smart strategy as demand for carbonated drinks is slowing with the rise of health consciousness. To make the products more relevant to the target crowd, a Facebook page and attractive contests have been put in place.
In FY2008, F&B producers faced a steep increase in the prices of soft commodities. Consequently, Nestle raised the prices of Nescafe and Maggi by 8% to10% in July 2008. The softening of the commodity prices later prompted the company to reduce the prices of Milo and milk products by 7% to 12% in February 2009, its first price-cutting exercise in six years. But crop prices reversed to higher levels earlier this year. In February, Nestle hiked the prices of Milo powder and 3-in-1 mixes by 9%.
Wildfires in Russia have caused wheat and other produce prices to shoot up. Cocoa prices reached a 33-year high in July, helped along by speculative activities. Costs for powdered wheat, cocoa, milk, coffee and wheat have risen at double-digit rates over the past few months. Nestle, like most F&B producers, is accustomed to commodity fluctuations and is therefore planning accordingly. At the briefing, management assured us that there are no plans for now to make consumers fork out more for Nestle products. We believe the company is monitoring a possible pricing action by its competitors. While it is true that it has some pricing power, consumers are shopping harder for deals, choosing more store-brand products and keeping an eye out for discounts.
FY2009's RM267 million record capex for new production lines for Nescafe and Coffeemate and the aggressive distribution drive for liquid drinks prove that Nestle has been increasing its investment in its brands. However, input costs are going up and the price pressure, especially from commodities, could pinch margins. While we continue to like Nestle's huge consumer base and reliable dividends, there is no mistaking management's cautious tone at Wednesday's briefing. Furthermore, the stock is the most expensive in our Malaysian F&B portfolio, trading at 24 to 26 times PER despite offering a bite-sized three-year EPS CAGR of 5.2%. ' CIMB Research, Sept 2
This article appeared in The Edge Financial Daily, September 3 2010.
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