M&A Securities Company Note PP14767/09/2012(030761) Nestle Malaysia Berhad Steering Away From Turbulence 1Q16 results review. To recap, Nestle Malaysia Berhad (Nestle) registered its 1Q16 revenue at RM1.3 billion, marking an annual improvement of 3% with net profit touching an encouraging RM221 million (+17% y-o-y), consisting 37% of our full year earnings expectation, fuelled by strong marketing, promotional supports and better-than-expected new product launches in 2015 that continued to benefit the group in 2016. HOLD (TP: RM79.52) Current Price (RM) New Fair Value (RM) Previous Fair Value (RM) Previous Recommend. RM76.70 RM79.52 RM61.50 SELL Upside To Fair Value 4% Dividend Yield (FY16F) 3% Stock Code Bloomberg Tuesday, June 21, 2016 Stock & Market Data NESZ MK Dividend. No dividend was declared in Q1 FY16. The group usually pays out dividend in the second and fourth financial quarter. Total dividend payout of RM2.60/share in FY15 made up 103% of the full year EPS, translating into yield of 3.6%. Food & Beverage (F&B) segment led the growth. F&B segment continued to dominate 80% of the total group sales in 1Q16 which saw a modest growth (+2.8% y-o-y) despite strong pre-gst expenditure in 1Q15, thanks to a bigger market share gained through various brand building exercises that helped stimulate turnover. Coming down to operating profit, the segment reported a rosy 14% y-o-y growth from RM201 million in 1Q15 to RM230 million in 1Q16. The exceptionally well results were attributed by favourable commodity prices (as the price of raw materials accounts for approximately 50% of the input cost) and diligent cost management. The other segment (Ex-F&B), also registered similar growth of 2.6% y-o-y and 10.9% y-o-y in the top-line and operating profit, respectively in 1Q16. Listing Sector Shariah Compliance MAIN MARKET Consumer Yes Issued Shares (mn) 234.5 Market Cap (RM mn) 17,986.2 YTD Chg In Share Price 4.6% Beta (x) 0.42 52-week Hi/Lo (RM) 76.70 70.81 6M Average Volume (shrs) 0.2 mn Estimated Free Float 10.1% Major Shareholders Nestle SA 72.61% Landsbanki Securities UK LTD 9.75% EPF 9.27% Expecting rise in specific raw material in 2H16. Nestle has been riding on favorable commodity trends in the past few quarters, however, the management anticipates the prices of certain commodities to rebound in the second half of 2016 such as coffee and milk powder which recently traded at and 1
USD1,600/MT, nearing its 2-year low level. Apparently this could trigger the last resort of the group by passing on the cost increase to consumers. Outlook. Nestle s latest RM288 million Sri Muda factory launched in October 2015 has boosted Nestle s Ready-to-Drink (RTD) division capacity by 60% to 120,000 MT/year, capturing the fastgrowing opportunities of RTD products such as MILO NUTRI G drink, NESCAFE coffee and NESTLE OMEGA PLUS UHT Milk in both domestic and export markets. Besides, Nestle had also spent about RM90 million capex for new Maggi high output noodle line, extending the capacity by 30% or a ramp-up of 20,000 MT/year. By scaling up manufacturing strength and continued in promotional activities, we expect Nestle s market share to increase from 15.8% to 17-20% in the next 3 years. Capex to continue to stay RM130 million RM200 million level in FY16-18. Stronger earnings visibility bolstered by the upgrade of manufacturing facilities would pare down borrowings and subsequently bring the group back to net cash position from the current mild gearing of 0.2x. Apart from manufacturing capability and operational efficiency, the movement of Ringgit also plays a vital role in commoditized business as the input costs are highly dependent on the commodity prices. The good news is the slower global economy has resulted in weak prices and oversupply in commodity market since end-2014. Coupled with the strengthening Ringgit performance, Nestle is set to benefit from the continued prevailing low level of commodity prices in the near term. Change to forecast. We revise our FY16-18 net profit to RM622 million/ RM665 million /RM700 million respectively, factoring in the earnings catalysts from the new Sri Muda factory and the extended noodle production line in Batu Tiga factory. This translates into FY16 EPS of 265 sen versus our previous forecast of 246 sen. Valuation and recommendation. After reviewing our earnings forecast, we rate Nestle as a HOLD from SELL with a revised target price of RM79.52. This is based on its 3-year mean of 28x, which is in line with Nestle s peers like F&N and Dutch Lady, pegged to our FY17 EPS forecast of 284 sen. We like Nestle for its growing bigger economies of scale, more than 100% dividend payout of its annual earnings and the recession proof business model which deserves closer attention in the investment community during this highly volatile period. Name Price (RM) Table 1: Peers Comparison EPS (sen) P/E (x) P/B RO FY1 FY1 FY1 FY1 FY1 FY1 E 4 5 4 5 4 5 (%) DY (%) TP (RM) NESTLE 76.70 235 252 29 29 21 24 80% 3% 79.52 HOLD F&N 25.50 71 76 24 24 4 4 16% 3% NA NA DUTCH LADY 57.80 172 220 25 22 17 19 90% 2% NA NA Call 2
Table 2: Financial Forecast FYE DEC (RM million) FY14A FY15A FY16F FY17F FY18F Revenue 4,809 4,838 5,128 5,385 5,654 EBITDA 837 886 985 1,062 1,119 D&A (112) (126) (136) (146) (158) Net interest income/ (expense) (24) (33) (62) (74) (76) JV & Associates 0 1 1 1 1 PBT 701 728 788 842 886 Tax expense (151) (137) (165) (177) (186) PAT 550 591 622 665 700 EPS (sen) 235 252 265 284 299 Dividend payout (sen) 235 260 212 227 239 Dividend yield (%) 3.1% 3.4% 2.8% 3.0% 3.1% EBITDA margin 17.4% 18.3% 19.2% 19.7% 19.8% PBT margin 14.6% 15.0% 15.4% 15.6% 15.7% PAT margin 11.4% 12.2% 12.1% 12.4% 12.4% Source: M&A Securities Table 3: Results Analysis FYE DEC (RM million) 1Q16 4Q15 1Q15 Q-o-Q Y-o-Y Revenue 1313 1199 1278 10% 3% Gross profit 522 460 498 13% 5% EBITDA 318 162 278 96% 14% Operating expenses (237) (332) (248) -29% -4% Operating profit 285 128 251 122% 14% Net finance costs (9) (10) (7) -6% 30% Share of tax profit of associate 0 0 0-24% -58% PBT 276 119 244 132% 13% Tax expense (55) (19) (56) 192% -2% PAT 221 100 188 121% 17% EPS (sen) 94 43 80 121% 17% GP margin 40% 38% 39% 1% 1% EBITDA margin 24% 14% 22% 11% 2% PBT margin 21% 10% 19% 11% 2% PAT margin 17% 8% 15% 8% 2% Source: Bursa Malaysia, M&A Securities 3
1/1/2012 1/8/2012 1/3/2013 1/10/2 1/5/2014 1/12/2 1/7/2015 1/2/2016 FBM Consumer Index (Points) KLCI (Points) RM 'million Jan-15 Mar-15 Apr-15 Jun-15 Jul-15 Sep-15 Oct-15 Dec-15 Jan-16 Mar-16 Apr-16 Price (RM) Points Nestle Share Price vs. KLCI (Jan 2015 May 2016) 78 77 76 75 74 73 72 71 70 69 68 67 1,850 1,800 1,750 1,650 1,600 1,550 1,450 Nestle (LHS) FBMKLCI (RHS) FBMKLCI Index vs. FBM Consumer Product Index (Jan 2012-YTD) 650 1,900 600 1,800 550 1,600 500 1,400 1,300 450 1,200 1,100 400 1,000 6,000 5,000 4,000 3,000 1,000 0 Revenue vs. Net Profit (2014 2018F) 5,654 5,385 5,128 4,809 4,838 550 591 622 665 700 FY14A FY15A FY16F FY17F FY18F Revenue PAT 4
USD/LB RM/MT Cocoa prices Nestle key material prices Skimmed milk prices 3,400 3,300 3,200 3,100 3,000 2,900 2,800 2,700 2,600 2,500 4,500 4,000 3,500 3,000 2,500 Crude palm oil prices Wheat Prices 2,900 2,700 2,500 2,300 2,100 1,900 650 600 550 500 450 400 Sugar prices Robusta coffee 18 17 16 15 14 13 12 11 10 2,200 2,100 1,900 1,800 1,600 1,400 1,300 1,200 5
M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +10% over the next 12 months. TRADING BUY Share price is expected to be +10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be -10% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities SdnBhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47,43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur Tel: +603 2282 1820 Fax: +603 2283 1893 Website: www.mnaonline.com.my 6