Nestle Malaysia’s valuation looks stretched — analysts

This article first appeared in The Edge Financial Daily, on November 7, 2018.


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KUALA LUMPUR: Nestle Malaysia (M) Bhd is among the best performing blue chips on Bursa Malaysia. Its share price has climbed over 60% in the past 12 months and that big gain paved the way for it to be a component stock of the FBM KLCI in December 2017.

However, the strong share price rally, partly because of the keen interests after it has become a component stock of the benchmark index, has now pulled down the food giant’s dividend yield to below 3% — lower than the fixed deposit rate in banks. Hence, investment analysts see that Nestle’s share price might have reached its peak, at least in the near term, despite the resilient earnings growth.

Most of them have a “sell” call on the consumer stock, citing the group’s valuation as looking stretched.

The 10 analysts, tracked by Bloomberg, have a target price (TP) of RM122.80, in the range of between RM97.40 and RM152. It is a difference of RM20.60 or 14.4% compared with Monday’s closing of RM143.40.

Year to date, Nestle Malaysia has climbed nearly 39%.

In its review on Nestle’s latest quarterly result, Kenanga Research said the company’s current valuations have already priced in its growth catalysts.

“We believe most positives have already been priced in following its stretched valuations post-inclusion into a key market index. In addition, its dividend yields are less attractive at the present price levels, generating 2% to 2.4% in FY18-FY19,” Kenanga Research added.

CIMB Research agreed that the group’s current valuations are too rich and unjustifiable at price-earnings (PER) ratio of 50 times based on forecast earnings for the financial year ending Dec 31, 2018 (FY18) and 46 times for FY19, which are +5 standard deviation of its historical five-year mean PER, despite its sound fundamentals.

CIMB Research has cut its target price to RM97.40, which implies a downside potential of 32%.

Nestle Malaysia’s net profit grew 15.7% to RM137.69 million in the third quarter ended Sept 30, 2018 (3QFY18) from RM119.01 million a year ago, boosted by higher turnover and an improved margin.

The quarterly revenue went up 8.3% to RM1.43 billion from RM1.32 billion in 3QFY17, driven by strong domestic and export sales.

For the cumulative nine-month period ended Sept 30, 2018 (9MFY18), the group’s net profit went up 4.7% to RM535.06 million from RM511.14 million a year ago, while revenue increased 4.8% to RM4.17 billion from RM3.98 billion in 9MFY17.

The group has declared a second interim dividend of 70 sen per share, bringing the total dividend to RM1.40.

Simply put, Nestle Malaysia did not disappoint investors with its earnings so far, but neither did it bring any pleasant surprise.

On the group’s prospects, Kenanga Research believes Nestle Malaysia could end the year with broader profits thanks to efficiency gains from the new National Distribution Centre and cost environment.

“Further savings may be reaped in the medium term as a fully optimised operation will allow the group to manage its entire domestic supply chain via in-house resources,” said Kenanga Research, which maintained a “underperform” call on Nestle Malaysia, with a TP of RM129.

MIDF Research, however, said it expects Nestle Malaysia to experience a subdued sales growth in the fourth quarter ending Dec 31, 2018 (4QFY18), mainly due to the temporary transition in spending after the end of the tax holiday (on Aug 30).

That said, MIDF Research, which has a “hold” call on Nestle Malaysia, believes the group’s earnings growth would remain stable because the prices of its products will not be significantly different under the sales and service tax, and continuous improvements in its market share, stabilising prices of agricultural commodities such as sugar, palm oil, cocoa and coffee beans.