Nestle - MARKET PERFORM - 22Mar12

Stock Name: NESTLE
Company Name: NESTLE (M) BHD

Research House: KENANGA

Price Call: BUY

Target Price: 58.00

We recently met up with Nestle's management and came back withour conviction strengthened that Nestle will continue to optimise returns toits shareholders. Despite all types of headwinds, the company has been able toconsistently improve its PATs and maintain its PAT margins over the years. In addition,it was also able to deliver high dividend payout ratios historically even withheavy capex investment. Despite its record high valuation level (27.2x FY12EPER) now, we reckon the stock will likely continue to re-rate itself on theback of its defensive nature and earnings performance consistency. We are maintainingour earnings forecasts and Market Perform rating on Nestle for now with anunchanged TP of RM58.00 based on our DCF model. This TP implies a PER of 27.2xon our FY12 forecast EPS of 205.8 sen. 

Fair for now, more inthe future. Over the years, Nestle has consistently improved its PAT andbringing it to new levels without fail. Its current share price has also morethan doubled compared with 5 years ago, arriving at a new record high PER of27x. The company has also never disappointed its shareholders even with the ebband flow of the market, even during when commodities prices were high to its disadvantage.This is mainly attributable to the strong support from its parent company,Nestle Global (NG), which has supported the company strongly in its operations.For instance, Nestle group worldwide has a global commodities procurement teamto ensure that all its subsidiaries, Nestle Malaysia included, were able topurchase the most cost effective raw materials with the right price and sourcein order to maximise profit optimisation. If we were to look forward toNestle's fair value two years down the road, it would potentially be RM62.70then based on our DCF model. 

The Halal thrust.To recap, Nestle Malaysia is the Halal Centre of Excellence for Nestle Global.According to the Halal Industry Development Corp, Malaysia's halal productsexports is expected to  grow at 10% thisyear due mainly to the government's efforts to promote the products overseas.Nestle exports its products, which are deemed halal, to more than 50 countriesworldwide with export sales of about RM1,161m for FY11, the exports sharehaving risen to about 25% of its overall sales compared  with approximately 22% in FY07. With a large Muslimpopulation of about 1.6b people globally, we expect the company to ride thegovernment bandwagon to promote Malaysia's halal products to continue growingits export segment. Additionally, untapped markets being targeted such asMyanmar would also potentially enhance the company's export sales. 

Likely to maintainpayout despite doubling its capex. Management is doubling FY12 capex toapproximately RM186.0m. The high capex is expected to be spent on the expansionof the capacity of its existing seven factories. It is, however, not confirmedwhich production lines would be upgraded or expanded. Despite this, we reckonthe company will still maintain its dividend payout ratio at about 90%. This ismainly supported by the fact that the company had actually still paid out about80%-130% of its earnings between 2007 and 2010 despite having a high capex(ranging from RM103m to RM302m) then as well.  

Steady earnings.We are maintaining our forecasts of Nestl'''s net earnings of RM482.7m andRM508.2 for FY12 and FY13 respectively. We continue to see better sales growthopportunities in the coming years for the company driven by the company's100-year old celebrations planned throughout the year and its consistent andinnovative management. We are maintaining our Market Perform rating on Nestlewith an unchanged TP of RM58.00 based on DCF model

Source: Kenanga