CIMB Research yesterday downgraded Nestle Malaysia Bhd to underperform given that there is “not much upside left” to the share price following its recent run-up.

While it acknowledged that Nestle’s band of household brands (Nescafe, Milo, Maggi and Kit Kat), huge consumer base and backing from the world’s biggest food group are a recipe for a defensive investment, it said the change in its recommendation was consistent with its recent change in market strategy.

“We have turned bullish on the market. We believe investors’ appetite will shift from defensive investments to higher beta investments. Other factors that are limiting interest in Nestle are lack of liquidity, expected gearing of more than one time in FY2011 against single-digit EPS (earnings per share) growth,” CIMB said.

It maintained its forecast and RM29.10 target price for Nestle.

“For exposure to the food and beverage sector, we prefer QSR Brands Bhd, which is trading at attractive PER multiples of between seven and eight times, while offering double-digit growth and decent dividends,” CIMB said.

CIMB also said Nestle was not likely to have further price cuts for its products this year following the recent Feb 16 price reductions for Milo products between 6.4% and 8.6%. Nestle did not lower prices for other products like Maggi, Everyday, Nespray and Nesvita, opting instead to increase their sizes by 8% to 12% from March to July.

“While the price of milk solid has eased, the price of palm oil, which is used in Maggi instant noodles and confectionery, has been creeping up. Having said that, Nestle will keep bringing popularly positioned products (PPP) to the market to suit economic conditions. PPP, which include Milo wafers priced at less than RM1 each, are wallet-friendly but are still nutritionally balanced.

“Introduced last year, PPP ensures that more Malaysians from all income groups are able to enjoy Nestle products at affordable prices,” CIMB said.
It also noted that the Maggi brand played “a substantial role” in boosting exports in 1Q09.

“Locally, the Maggi instant noodles, sauces and pastes remain popular but it is the ready-in-a-jiffy Maggi noodles that have racked up the sales in the international markets such as the Middle East, Oceania and Europe. In 1Q09, revenue contribution from the prepared dishes and cooking aids division, led by Maggi, jumped to 19.4% from 14% in FY06,” it said.

CIMB also expected further reduction in Nestle’s trade receivable days. Nestle’s trade receivables days had reduced substantially from 38 days in 1Q08 to 22 days in 1Q09, largely helped by a distributor card programme that is a tie-up between Nestle and American Express.

“We understand that sales transacted under this programme, which amount to more than half the group sales, are collected the next day, helping Nestle to get cash quicker. This strategy is so successful that other Nestle units may soon adopt it,” CIMB said.

Nestle was flat at RM29.25 yesterday.