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This article first appeared in The Edge Financial Daily on February 15, 2019

Nestle (M) Bhd
(Feb 14, RM148.90)
We initiate underweight with fair value (FV) of RM125:
We initiate coverage on Nestle Malaysia with an “underweight” call and FV of RM125 based on discounted cash flow valuation (5.7% weighted average cost of capital, 2% terminal growth rate). At RM125 per share, the implied profit earnings (PE) for FY19F is 39 times.

 

We expect the company to register core net earnings of RM695.5 million, RM744.8 million and RM810.5 million for FY18F, FY19F and FY20F respectively. We like Nestle for its established household brand presence, position as the market leader in the fast-moving consumer goods (FMCG) space and management’s progressive efforts to streamline its operations with expectations of improved margins. However, we believe the stock, which is currently trading at 53.8 times PE, is already fully valued.

Nestle Malaysia started in Penang in 1912 as Anglo-Swiss Condensed Milk Company before moving to Kuala Lumpur in 1939. Now, Nestle has eight factories and is headquartered in Mutiara Damansara. Nestle Malaysia is the biggest halal producer in the Nestle world, marketing more than 500 halal products with leading household brand names. Nestle is the market leader in the FMCG market with 15.5% share. The group has consistently delivered net earnings compound annual growth rate of 8% in the past 10 years. Nestle Malaysia was able to achieve stable growth due to the affordability and innovativeness of its products. Its sheer size and established presence will cement its position as the market leader in the FMCG space.

In 2016, Nestle developed its long-term growth strategy called FIT (Fuel to Grow, Innovate to Grow and Transform to Grow) strategy. FIT aims to enhance efficiencies and encourage innovation by making the products better and less costly. We believe that streamlining efforts will continue to support Nestle’s margins.

Nestle will consolidate all its Milo manufacturing in the Chembong factory in Negeri Sembilan as part of its strategy to establish the factory as the world’s biggest Milo Manufacturing Centre of Excellence.

This move will allow Nestle to better allocate its resources to its more established brands and achieve economies of scale, further improving its margins. — AmInvestment Bank, Feb 14

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