Nestle (M) Bhd (Nov 8, RM49.50)
Maintain neutral at RM50 with revised target price of RM47.35 (from RM46.90): Nestle’s 9MFY11 net profit rose 4.9% year-on-year (y-o-y) to RM369.2 million. It is in line with our but above consensus estimates, accounting for 78.8% and 81.4% of the full-year figures. No dividend was declared for this quarter.
Nestle’s 9MFY11 revenue registered a double-digit growth of 14.7% y-o-y to RM3.5 billion against the preceding year’s RM3.1 billion. The good performance was boosted by better growth in domestic and export sales. Input costs still remained at high levels for Nestle at RM671.1 million (+15.9% y-o-y). The main culprit still lies in the rising prices of raw materials such as coffee beans (+15.8% year-to-date). The escalating raw material prices have also led to a lower earnings before interest and tax (Ebit) margin of 0.9 percentage points.
The encouraging sales were boosted by higher aggregate demand due to the festive season, fasting month and Hari Raya Aidilfitri as well as benefiting from the round of price increases on selective products in May. Contrary to that, net profit on a sequential basis dropped slightly to RM110 million (-2.8% y-o-y) from RM113.2 million due to a higher-than-expected effective tax rate.
The rise in raw material prices still remains the biggest challenge to Nestle. The surge in commodity prices will put further pressure on its input costs. However, it is worth noting that Nestle will closely monitor the movement in commodity prices, improve operational efficiencies and cost savings to avoid having to pass on the costs to consumers.
On Nestle’s annualised earnings, our forecast fell slightly behind at 4.9% y-o-y mainly due to its higher-than-expected robust business anchored by price hikes on selected products. Therefore, we fine tune our earnings forecast by +4.5% for FY11 and +7% for FY12.
The earnings revision has lifted our discounted cash flow target price to RM47.35 (previous RM46.90) with weighted average cost of capital of 8% (previous WACC of 7.6%). We like Nestle for its defensive nature. From an earnings perspective, Nestle’s FY12 price-earnings ratio of 22.5 times is considered expensive compared with its peers such as F&N (18.9 times PER), Nestle SA (15.4) and Cerebos Pacific (12.4). However, we still expect Nestle to outperform the KLCI during troubled times. We think it’s an attractive stock given its high dividend yield of 4.4%. Therefore, we maintain our “neutral” recommendation on Nestle. — MIDF Research, Nov 8
This article appeared in The Edge Financial Daily, November 9, 2011.
Maintain neutral at RM50 with revised target price of RM47.35 (from RM46.90): Nestle’s 9MFY11 net profit rose 4.9% year-on-year (y-o-y) to RM369.2 million. It is in line with our but above consensus estimates, accounting for 78.8% and 81.4% of the full-year figures. No dividend was declared for this quarter.
Nestle’s 9MFY11 revenue registered a double-digit growth of 14.7% y-o-y to RM3.5 billion against the preceding year’s RM3.1 billion. The good performance was boosted by better growth in domestic and export sales. Input costs still remained at high levels for Nestle at RM671.1 million (+15.9% y-o-y). The main culprit still lies in the rising prices of raw materials such as coffee beans (+15.8% year-to-date). The escalating raw material prices have also led to a lower earnings before interest and tax (Ebit) margin of 0.9 percentage points.
The encouraging sales were boosted by higher aggregate demand due to the festive season, fasting month and Hari Raya Aidilfitri as well as benefiting from the round of price increases on selective products in May. Contrary to that, net profit on a sequential basis dropped slightly to RM110 million (-2.8% y-o-y) from RM113.2 million due to a higher-than-expected effective tax rate.
The rise in raw material prices still remains the biggest challenge to Nestle. The surge in commodity prices will put further pressure on its input costs. However, it is worth noting that Nestle will closely monitor the movement in commodity prices, improve operational efficiencies and cost savings to avoid having to pass on the costs to consumers.
On Nestle’s annualised earnings, our forecast fell slightly behind at 4.9% y-o-y mainly due to its higher-than-expected robust business anchored by price hikes on selected products. Therefore, we fine tune our earnings forecast by +4.5% for FY11 and +7% for FY12.
The earnings revision has lifted our discounted cash flow target price to RM47.35 (previous RM46.90) with weighted average cost of capital of 8% (previous WACC of 7.6%). We like Nestle for its defensive nature. From an earnings perspective, Nestle’s FY12 price-earnings ratio of 22.5 times is considered expensive compared with its peers such as F&N (18.9 times PER), Nestle SA (15.4) and Cerebos Pacific (12.4). However, we still expect Nestle to outperform the KLCI during troubled times. We think it’s an attractive stock given its high dividend yield of 4.4%. Therefore, we maintain our “neutral” recommendation on Nestle. — MIDF Research, Nov 8
This article appeared in The Edge Financial Daily, November 9, 2011.
