Investment Highlights

• We initiate coverage on Nestle (Malaysia) with an UNDERWEIGHT call and FV of RM125.00 based on DCF valuation (5.7% WACC, 2.0% terminal growth rate). At RM125.00/share, the implied PE for FY19F is 39x.

• We expect the company to register core net earnings of RM695.5mil, RM744.8mil and RM810.5mil for FY18F, FY19F and FY20F respectively. We like Nestle for its established household brand presence, position as the market leader in the 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 53.8x PE, is already fully valued.

• Nestle (Malaysia) (Nestle) started in Penang in 1912 as Anglo-Swiss Condensed Milk Company before moving to Kuala Lumpur in 1939. Now, Nestle has 8 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.

• As producers of well-known household brands (Milo, Maggi, Nescafe), Nestle’s earnings visibility remains stable, underpinned by the following factors:

1. Market leader in the FMCG space. Nestle is the market leader in the FMCG market with 15.5% share. The group has consistently delivered net earnings CAGR 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.

2. Strategy for long-term growth. 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.

3. Milo production expansion. Nestle will consolidate all its Milo manufacturing in the Chembong factory in Negri 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.

Source: AmInvest Research - 14 Feb 2019