Nestle - MARKET PERFORM - 22Mar12

We recently met up with Nestle’s management and came back with our conviction strengthened that Nestle will continue to optimise returns to its shareholders. Despite all types of headwinds, the company has been able to consistently 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 with heavy capex investment. Despite its record high valuation level (27.2x FY12E PER) now, we reckon the stock will likely continue to re-rate itself on the back of its defensive nature and earnings performance consistency. We are maintaining our earnings forecasts and Market Perform rating on Nestle for now with an unchanged TP of RM58.00 based on our DCF model. This TP implies a PER of 27.2x on our FY12 forecast EPS of 205.8 sen. 

Fair for now, more in the future. Over the years, Nestle has consistently improved its PAT and bringing it to new levels without fail. Its current share price has also more than doubled compared with 5 years ago, arriving at a new record high PER of 27x. The company has also never disappointed its shareholders even with the ebb and 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 team to ensure that all its subsidiaries, Nestle Malaysia included, were able to purchase the most cost effective raw materials with the right price and source in order to maximise profit optimisation. If we were to look forward to Nestle’s fair value two years down the road, it would potentially be RM62.70 then 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 products exports is expected to  grow at 10% this year due mainly to the government’s efforts to promote the products overseas. Nestle exports its products, which are deemed halal, to more than 50 countries worldwide with export sales of about RM1,161m for FY11, the exports share having risen to about 25% of its overall sales compared  with approximately 22% in FY07. With a large Muslim population of about 1.6b people globally, we expect the company to ride the government bandwagon to promote Malaysia’s halal products to continue growing its export segment. Additionally, untapped markets being targeted such as Myanmar would also potentially enhance the company’s export sales. 

Likely to maintain payout despite doubling its capex. Management is doubling FY12 capex to approximately RM186.0m. The high capex is expected to be spent on the expansion of the capacity of its existing seven factories. It is, however, not confirmed which production lines would be upgraded or expanded. Despite this, we reckon the company will still maintain its dividend payout ratio at about 90%. This is mainly supported by the fact that the company had actually still paid out about 80%-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 Nestlé’s net earnings of RM482.7m and RM508.2 for FY12 and FY13 respectively. We continue to see better sales growth opportunities in the coming years for the company driven by the company’s 100-year old celebrations planned throughout the year and its consistent and innovative management. We are maintaining our Market Perform rating on Nestle with an unchanged TP of RM58.00 based on DCF model

Source: Kenanga