Nestle, via its wholly-owned subsidiary announced it has reached an agreement to dispose of its chilled dairy business (RM14.2m) and a segment of its packing business (RM141.1m) for a total cash consideration of RM155.3m to Lactalis Malaysia. The proceeds will be used to upgrade their current Milo production facility and reduce gearing. We maintain our SELL call on the back of unchanged DDM based TP of RM112.30 as we opine that its valuation is too rich. Nestle currently trades at 47.0x FY18 P/E compared to its parent-co (Switzerland) at 20.8x and sister-co (Nigeria) at 24.6x.

NEWSBREAK

Nestle, via its wholly-owned subsidiary announced it has reached an agreement to dispose of its chilled dairy business (RM14.2m) and a segment of its packing business (RM141.1m) for a total cash consideration of RM155.3m to Lactalis Malaysia Sdn Bhd. The sale of the chilled dairy business and packaging business is expected to be effective on 1 January and 1 July 2019, respectively.

Nestle announced they intend to use RM100m from the disposal to upgrade their Milo production facility in Negeri Sembilan. The remaining funds will be used to reduce bank borrowings.

Revenue contributed by the chilled dairy business for FY15-17 was RM114.9m, RM116.9m and RM106.1m, respectively.

HLIB’S VIEW

We are neutral on this disposal as the revenue contribution from the chilled dairy business was minimal (under 2% of total FY18 sales). In any case, we expect the increased production from the Milo facility to compensate for the loss of revenue associated with the chilled dairy business. On a pro-forma basis, should the sale go through, Nestle’s net gearing would be reduced from 52.3% to 43.2% based on 2Q18 financial statements. Furthermore, we estimate finance costs to be reduced by RM5.5m per annum from RM39.0m to RM33.5m.

Forecast. Given the expected minimal impact, we keep forecasts unchanged for now.

Maintain SELL. Despite favourable domestic consumption indicators (sales tax holiday and rebounding consuming sentiment), we maintain our SELL call as we feel that valuation is unjustifiably rich. At current price, Nestle is trading at 47.0x FY18 P/E and yielding an unattractive 2.1% in dividend. In comparison, its holding-co in Switzerland trades at 20.8x FY18 P/E while its sister-co in Nigeria trades at 24.6x FY18 P/E. We opine that Nestle’s entry into the MSCI and KLCI index in late-2017 may have forcefully inflated its share price due to accumulation from index tracking funds. We maintain our TP of RM112.30 based on DDM valuation methodology (r: 6.8%, TG: 3.5%).

Source: Hong Leong Investment Bank Research - 10 Oct 2018