Sector Manager: Richard Sparkes Senior Analyst: Patrick Folan Analysts: Cian Mulcahy, Marie-Louise O' Callaghan, Ioustina Martin

Transcription

1 Nestlé Pitch

2 Sector Manager: Richard Sparkes Senior Analyst: Patrick Folan Analysts: Cian Mulcahy, Marie-Louise O' Callaghan, Ioustina Martin

3 Introduction: Company Snapshot Nestlé one year share price performance against SWX Recommendation BUY Current Price CHF Price Target CHF CHF Upside 5.4 % Timeline 3/4 years Market Cap. CHF 230 (B) 52wk range CHF P/E Div. Yield 3.05% FCF Yield 3.38% Analyst Consensus Buy

4 Summary of Investment Thesis While there is limited catalysts for growth exist Nestlé s broadly based organic growth across segments and categories prevent it from being affected from adverse economic cycles. Returns will be driven from its existing market leading position, high quality management and positive growth strategy. In our view, Nestle is set to be one of the main beneficiaries of the soaring demand for food, driven by the global population growth and the increase in nutritional awareness of the average consumer. Margin growth of 20-30bps will continue to improve as their 3 fastest growth categories (Powdered & Liquid Beverages, Nutrition & Healthcare and Pet Care) are also the categories with the largest margins. will continue to grow. Decent dividend yield of 3.05% (2.23% increase) should drive a 12-13% total shareholder return with potential for another share buyback scheme. Long term organic top-line growth of 5-6% will be driven by rising sales volumes through 44% exposure to high growing EM s and premiumisation and improving macroeconomic conditions in developed markets. Nestlé s successful R&D and proven ability to address problematic businesses such as US frozen food will help ensure returns in the long term. Improved working capital and controled capex have led to improved cash generation which gives Nestlé the scope for more buybacks beyond 2015.

5 Company Overview

6 Business Overview Formed in 1905 and is now headquartered in Switzerland. Nestle s product line includes milk, chocolate, confectionery, bottled water, coffee, creamer, food seasoning and pet foods. It sells its products through supermarkets, natural food distributors/shops, and drug stores Nestlé maintain a long term 25% ownership of L'Oréal which gives Nestle access to major fashion brands such as Lancôme, Yves saint Laurent, Giorgio Armani. It operates in 197 countries with over 335,000 employees. Its main market is the United States but it also has a strong presence across Europe and into Asia. It generates its main revenue through its beverages, health products, dairy products, and confectionary sales. With more than 2,000 brands, Nestle has formed a varied portfolio and, in turn, gained a secure foothold in international markets, leaving it less susceptible to market fluctuations.

7 Major Brands KIT KAT - Kit Kat is a chocolate-covered wafer biscuit bar produced in 17 countries worldwide. KitKat is just one example of Nestlé's numerous high performing confectionary brands including Smarties and Aero. SAN PELLEGRINO - Mineral and carbonated water in addition to assorted fruit sodas ae sold under the brand. This product plays a large role in the Nestle waters section which saw 5.4% organic growth and 9.7% trading operating profit margin in its last annual report. NESCAFE - The fifth most valuable food and drinks brand in the world, with a brand value of $17.3b, and sales of $9.8b makes it Nestlé's single largest brand. PURINA - Acquired in 2001, Nestle Purina pet care are now the second largest pet care brand in the world, selling products such as Bakers, Alpo, and Felix. MAGGI - is an international brand of seasonings, instant soups and noodles. Its noodle brand holds significant dominant market shares in Malaysia and India and 5.2 Billion noodles packs were sold in 2014.

8 Competitors Danone : Danone produces dairy products, beverages, baby food and clinical/medical nutrition products. Key brands such as Activia, Evian and SGM are direct competitors in some of Nestle s fast growing segments. Stock is currently overvalued P/E ratio MARS : Mars is a close competitor in both the confectionary and pet care products industries. Mars lack the market penetration in certain products that Nestle has in products. Kraft-Heinz : Sells foods including ketchup, sauces, meals, snacks, and other food products. Major competitor in United states and in prepared meals segment. Stock is currently overvalued P/E ratio

9 Sales Breakdown In 2014 Nestle s organic growth was 4.5%, composed of 2.3% real internal growth and 2.2% pricing. Sales were CHF 91.6 billion, down 0.6%, impacted by negative foreign exchange of 5.5%. Acquisitions, net of divestitures, added 0.4% to sales. The Nestle Group s organic growth was broad-based, 5.4% in the Americas, 1.9% in Europe and 5.7% in Asia, Oceania and Africa. Developed markets grew 1.1%, achieving sales of CHF 51.4 billion and emerging markets business grew 8.9%, delivering sales of CHF 40.2 billion. Breakdown of Nestlé's sales in CHF (Millions) for first nine months of 2015 Petcare Confectionery Prepared dishes and cooking aids Nutrition and Health Science Milk products and ice cream Water Powdered and liquid beverages Sales geographically are broken down as : - 43% in the America s, - 28% in Europe - 26% in Asia/Africa/Oceania

10 Financial Overview

11 Financials Summary Total Revenue CHF B Gross Margin 48.20% EBITDA CHF B EBITDA Margin 18.70% ROE 23.9% FCF Margin (TTM) 11.9% Total Debt CHF 22.82B FCF Yield 4.10% Total Debt/Equity 0.37 Div. Yield 3.05%

12 Income Statement

13 Balance Sheet & Cash Flow Statement

14 Debt Analysis The Group s net debt fell from CHF 14.7B to CHF 12.3B reflecting strong free cash flow for the year at CHF 14.1B more than offsetting the payment of the dividend of CHF 6.9B and initial phase of the current share buy-back programme Current portion of LT debt totals 36 million that can be comfortably covered with a 4.7B cash balance Long term debt position of 11.62B which is in line with historic 5 year averages but is higher than the industry average of 9.52B Debt to equity stands at 0.37 compared to an industry average of 0.81 Capital discipline is the primary focus of management divesting holdings in various ice cream and packaged foods business since 2014 Debt to capital stands in line with historical averages at 0.22 very healthy leverage ratio compared to the 2015 industry average of 0.93 Healthy ebitda/interest expense ratio at compared to the industry average of S&P gives them a AA rating implying a very strong capacity to meet financial commitments and Fitch rating of AA+ implying almost no chance of default risk and is not significantly vulnerable to foreseeable events Growing cash balance, rising net income levels, and a history of being trustworthy borrowers gives Nestle flexibility for future acquisitions in the targeted skin care space

15 Valuation

16 Valuation: Comparable Multiples

17 Implied Multiples Valuation Metric Avg. Industry Value Implied Price P/E FWD P/E P/B Average Price CHF 88.5(+25.26%) Method Industry Multiples EV/EBITDA Model Weight 50% 50% Price Target CHF (+14.8%) EV/EBITDA Model EBITDA: 17,197 Low Base High EV/EBITDA EV 208, , ,934 + Cash 4, Debt 22,820.0 Value of Equity 190, , ,845 No. Shares 3,188.4 Per Share Value (CHF) Potential Upside % +0.69% %

18 Discounted Cash Flow Valuation Total Revenue 2015A 2016E 2017E 2018E 2019E Growth Rate 89,564 93,171 98, , , % EBIT 13,767 14,583 15,557 16,735 18, % Income Tax -3,717-3,937-4,200-4,518-4,866 27%(EBIT) Unlev Net In. 10,050 10,646 11,357 12,217 13,157 Capital Exp. 4,424 4,608 4,840 5,140 5,451 Changes WC 4,746 4,472 3,913 3,913 3,913 Total FCF 9,192 9,513 10,698 11,620 12,203 Discounted Cash Flow Valuation Terminal Growth 2.30% Total Enterprise Value 285,055 WACC 8.71% Total Equity Value 270,055 Estimated Value per share $84.71

19 Risk

20 Qualitative Risk Unfavourable currency devaluations or fluctuations in currency values in addition to a continued major deterioration in EMs growth including in particular Brazil and China may hinder Nestlé's strategy of long term organic growth of 5-6%. Any major event triggered by adverse weather conditions, change in macroeconomic environment, resulting in input price volatilities and/or capacity constraints, could potentially impact Nestlé's financial results. Nestle is dependent on sustainable manufacturing/supply of finished goods for all product categories. A major event in one of Nestlé's key plants, at a key supplier and/or warehouse facility could potentially lead to a supply disruption and impact Nestlé's sales and profitability. Any major event triggered by a serious food safety or other compliance issue could have a negative effect on Nestlé's reputation or brand image. (e.g.. Maggi noodles in India)

21 Quantitative Risk 1 Yr 2 Yr Expected Return Standard Deviation (volatility) Skew Kurtosis Beta RSQ

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