KUALA LUMPUR (Oct 10): CIMB IB Research has maintained its "reduce" rating on Nestle (M) Bhd at RM164.40 with an unchanged target price (TP) of RM97.40 following the company's plans to sell its chilled dairy business for RM153.3 million cash, including the factory in Petaling Jaya.

In a note yesterday, CIMB said the sale was expected to have minimal impact on Nestle's core earnings as the business (mainly yogurt products) only contributed 2% to 2.4% of its total FY15 to FY17 revenue.

The factory manufactures chilled dairy products, cold sauces and packaged milk powder. The deal includes the rights to distribute, market, promote and sell chilled dairy products in Malaysia, Singapore and Brunei.

The buyer is Lactalis Malaysia Sdn Bhd, which is owned by France-based global dairy group Lactalis. The disposal will be done in two stages: chilled dairy business on Jan 1, 2019 for RM14.2 million and the manufacturing business by July 1, 2019 for RM141.1 million.

"We expect Nestle to recognise a one-time gain of RM27 million which will be split over FY18 and FY19. In total, this represents a one-time earnings per share (EPS) gain of ~11 sen. Nestle is unlikely to declare a special dividend as it said it plans to utilise the proceeds from the disposal for capital expenditure (capex) and payment of bank borrowings," CIMB said.

Meanwhile, CIMB said the disposal will allow Nestle to centralise the production of all its Milo beverages. As part of its upcoming capex plans, Nestle will invest up to RM100 million to set up a Milo manufacturing centre in its existing Chembong factory in Negeri Sembilan by the second half of 2019 (2H19).

Also, Nestle will move all existing Milo manufacturing assets from the Petaling Jaya factory to the Chembong factory by July 1, 2019. While this will potentially increase operating efficiencies and increase capacity, this will also make the Chembong factory the largest Milo factory in the world in terms of volume.

As part of the disposal, it will not conduct any business of production, distribution or sales of chilled dairy goods in Malaysia, Singapore and Brunei for a five-year period.

"We expect minimal financial impact from this disposal. Our reduce call and DCF-based TP of RM97.40 remain unchanged. Although Nestle's fundamentals remain sound, we believe that its valuations are too rich at this juncture and unjustifiable at FY18F/19F price earnings ratios (P/E) of 50 times/46 times, which are +5s.d. of its historical 5-year mean P/E.

"Its estimated FY18 to 20F dividend yields of 1.9% to 2.2% are also unappealing against the broader consumer sector's average yield of c.3%. Upside risks to our call include better-than-expected export demand and a significant recovery in domestic spending," CIMB said.

At 11.08am, Nestle shed 0.27% or 40 sen to RM146 with 41,800 shares done.