Stock Name: NESTLE
Company Name: NESTLE (M) BHD
Research House: MAYBANK
Nestle (Malaysia) Bhd
(April 26, RM48)
Downgrade to sell at RM48.18 with target price of RM45: Nestle (Malaysia)'s share price has done well, up 11% year-to-date (YTD), outperforming the FBM KLCI by 0.3% and surpassing our RM45 discounted cash flow-based target price. Last Friday's analyst briefing post 1Q11 results reporting offers no new developments; we maintain our forecasts.
The stock currently trades at 25.6 times 2011 earnings, which is at one standard deviation above its mean price-earnings ratio of 24.8 times since 2000. We think its near-term earnings growth potential is fully in the price, while dividend yield has also tapered off with the rise in its share price.
Higher commodity prices affected 1Q11 margins. Domestic and export sales contributed 16.1% y-o-y to turnover growth in 1Q11. Domestic and export sales rose by 15.9% and 16.8% y-o-y respectively. Exports contribution to total turnover was, however, unchanged at 23%.
The higher 1Q11 turnover incorporated price hikes for Milo and Nescafe mixes by 6% and 4% respectively in February 2011. We estimate that 1Q11 sales volume rose by up to 10% y-o-y.
Higher commodity prices have affected margins which contracted 0.7 percentage points y-o-y to 16.5% at the operating levels.
There will be a second round of price hikes this year for Milo powder and Milo Fuze, by 4%, and for Nescafe soluble coffee by 6%. We estimate that the second price increase would only partially offset higher global cocoa and coffee prices, which have risen by an average of'' 5% and 15% to 30% respectively YTD. We estimate that Milo and Nescafe contributed 30% and 19% to total sales in 1Q11.
Nestle (Malaysia) plans to spend RM100 million to RM120 million in 2011 to raise capacity and maintenance. The amount spent in 1Q11 was only RM7 million. The planned capital expenditure for 2011 is lower than 2010's RM144 million.
We retain our RM140 million to RM150 million capex assumption for now. Our financial model derives RM500 million free cash flow for 2011, which supports our RM1.79 dividend per share forecast for the year. This implies 3.7% net yield at the current share price level.
Cereal Partners Worldwide, a 50:50 joint venture between General Mills Inc and Nestle SA, will invest RM115 million for a new breakfast cereal plant located adjacent to Nestle (Malaysia)'s existing plant in Chembong, Negri Sembilan.
This will be the third breakfast cereals production facility in the region besides the other two located in Lipa, the Philippines, and Tianjin, China.
The 6,500 sq m plant is expected to start production in 2Q12, selling to the domestic and export markets. Presently, all breakfast cereal for domestic consumption is imported from the Philippines. Nestle SA's venture will have no impact on Nestle (Malaysia)'s financials. ' Maybank IB Research, April 26
This article appeared in The Edge Financial Daily, April 27, 2011.
Company Name: NESTLE (M) BHD
Research House: MAYBANK
Nestle (Malaysia) Bhd
(April 26, RM48)
Downgrade to sell at RM48.18 with target price of RM45: Nestle (Malaysia)'s share price has done well, up 11% year-to-date (YTD), outperforming the FBM KLCI by 0.3% and surpassing our RM45 discounted cash flow-based target price. Last Friday's analyst briefing post 1Q11 results reporting offers no new developments; we maintain our forecasts.
The stock currently trades at 25.6 times 2011 earnings, which is at one standard deviation above its mean price-earnings ratio of 24.8 times since 2000. We think its near-term earnings growth potential is fully in the price, while dividend yield has also tapered off with the rise in its share price.
Higher commodity prices affected 1Q11 margins. Domestic and export sales contributed 16.1% y-o-y to turnover growth in 1Q11. Domestic and export sales rose by 15.9% and 16.8% y-o-y respectively. Exports contribution to total turnover was, however, unchanged at 23%.
The higher 1Q11 turnover incorporated price hikes for Milo and Nescafe mixes by 6% and 4% respectively in February 2011. We estimate that 1Q11 sales volume rose by up to 10% y-o-y.
Higher commodity prices have affected margins which contracted 0.7 percentage points y-o-y to 16.5% at the operating levels.
There will be a second round of price hikes this year for Milo powder and Milo Fuze, by 4%, and for Nescafe soluble coffee by 6%. We estimate that the second price increase would only partially offset higher global cocoa and coffee prices, which have risen by an average of'' 5% and 15% to 30% respectively YTD. We estimate that Milo and Nescafe contributed 30% and 19% to total sales in 1Q11.
Nestle (Malaysia) plans to spend RM100 million to RM120 million in 2011 to raise capacity and maintenance. The amount spent in 1Q11 was only RM7 million. The planned capital expenditure for 2011 is lower than 2010's RM144 million.
We retain our RM140 million to RM150 million capex assumption for now. Our financial model derives RM500 million free cash flow for 2011, which supports our RM1.79 dividend per share forecast for the year. This implies 3.7% net yield at the current share price level.
Cereal Partners Worldwide, a 50:50 joint venture between General Mills Inc and Nestle SA, will invest RM115 million for a new breakfast cereal plant located adjacent to Nestle (Malaysia)'s existing plant in Chembong, Negri Sembilan.
This will be the third breakfast cereals production facility in the region besides the other two located in Lipa, the Philippines, and Tianjin, China.
The 6,500 sq m plant is expected to start production in 2Q12, selling to the domestic and export markets. Presently, all breakfast cereal for domestic consumption is imported from the Philippines. Nestle SA's venture will have no impact on Nestle (Malaysia)'s financials. ' Maybank IB Research, April 26
This article appeared in The Edge Financial Daily, April 27, 2011.
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