Saturday, October 4, 2014

NESTLE - The Biggest Loser From Recent Petrol Price Increase and GST in 2015?



Background:
Nestle (Malaysia) Berhad or NESTLE need not further introduction as its products has been part and parcel of Malaysian lifestyle for more than 100 years. Please read the details on its rich history at the end of this page. Operationally, the Company has two divisions namely Food & Beverage (F&B) and Others (Nutrition & Nestle Professional). Nutrition deals with specific food for workout purposes while Nestle Professional is a one stop F&B provider that caters for out of home channels. In FY13, F&B division contributed RM595m or 80% of the Group’s Operating Profit. The remaining 20% or RM146m Operating Profit is from “Others”.

Challenging FY14 and FY15
Despite its rich history, NESTLE stands to face challenging year in FY14 and FY15 due to recent petrol hike which directly affect consumer spending. Some of its product in the high end market (e.g. Nestle Bliss, Kit Kat and Nescafe Dolce Gusto) may face lower demand due to lower consumer spending resulting in consumer purchasing more affordable products. Ultimately, this should result in lower margin going forward.

1H14 earnings declined 7% YoY to RM302m
Despite 1H14 revenue increased by 4% to RM2.54b, NESTLE net profit slipped 7% YoY to RM302m. This is caused by 1H14 EBIT margin which has declined to 15.9% (from 1H13 level of 17.4%). In its Bursa announcement, NESTLE blamed the lower earnings on “unfavourable input costs and higher marketing investments”. While this is true, it is possible that its higher margin product has experienced slow down in sales thus affecting whole Group margin.

Outlook for rising interest rate in 2015 made NESTLE share less appealing
It is widely expected that US Federal Reserves will raise its interest rate in 2015 although the timeline is still unclear. If such thing happens, NESTLE share (which tend to appealing due to its dividend) may be less appealing to institutional investors. Based on the flattish dividend of 60.0 sen at 1H14, it is likely that RM2.35 given in FY13 will remain same for FY14 this year. Based on this RM2.35 dividend expected and RM66.52 share price on 2-Oct-2014, the dividend yield is 3.5%. Note that this is already lower than 10-year bond yield of 3.89% meaning share price has to retreat in order for yield to be more comparable to bond yield.

Theoretical Target Price of RM58.75
Based on 4% yield target to FY14 estimated dividend of RM2.35, NESTLE theoretical fair value is RM58.75. Comparing this to latest share price of RM66.52, this represents 12% downside.

Nestle History in Malaysia.


Nestlé's commitment to providing quality products to Malaysians dates back almost 100 years ago. Nestlé began in Malaysia in 1912 as the Anglo-Swiss Condensed Milk Company in Penang and later, growth and expansion made a move to Kuala Lumpur necessary in 1939.

Since 1962, with its first factory in Petaling Jaya, Nestlé Malaysia now manufactures its products in 7 factories and operates from its head office in Mutiara Damansara.

The Company was publicly listed on the KLSE now known as Bursa Malaysia Berhad on 13 December, 1989. Today, the Company employs more than 5000 people and manufactures as well as markets more than 300 Halal products in Malaysia. Its brand name such has MILO®, NESCAFÉ®, MAGGI®, NESPRAY® and KIT KAT® have become trusted household names and enjoyed for generations.

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