Nestle recently announced the disposal of its chilled dairy business, including the Petaling Jaya (PJ) factory that houses the manufacturing of chilled dairy products, cold sauces and the packing of milk powder for subsidiaries of Lactalis Malaysia, for a total consideration of RM155.3m. Of this, RM100m will be used to consolidate the MILO operations in the Chembong factory in Negeri Sembilan, while the remainder will be used to pare down debt. We believe that the selling price appears reasonable but are neutral on this development as the impact of the gain on disposal is relatively muted. Maintain SELL mostly on valuation grounds.

Hiving Off the Chilled Dairy Business and PJ Factory

Nestle announced the proposed disposal of its chilled dairy product business and the manufacturing of chilled dairy products, cold sauces, and the packing of milk powder, which includes the PJ factory and all the manufacturing fixed assets, to subsidiaries of Lactalis Malaysia. The total consideration of the purchase is RM155.3m which will be paid in two stages (1 January 2019 and 1 July 2019). The disposal will result in a onetime gain amounting to RM27m (representing EPS of 11 sen), which will be recognised over FY18 and FY19.

Sales Price Looks Reasonable, Despite Discount to Recent Transaction

Valuation-wise, the price to sales ratio of 1.5x appears to be at a discount to Lactalis’ comparable acquisition of Stonyfield, a U.S. dairy business, in 2017 at a 2.4x price to sales ratio (source: Reuters). Nonetheless, we believe that the discount is fair considering Stonyfield has much larger operations compared to Nestle’s chilled dairy business.

Proceeds to Consolidate MILO Factory and Pare Down Debt

Nestle has earmarked the bulk of the proceeds (RM100m) to consolidate the MILO business in its existing factory in Chembong, Negeri Sembilan. We are positive on this as the expansion of the factory will allow Nestle to tap into growing demand for MILO products in the region. The remainder of the proceeds will be utilised to pare down debt. We estimate that this will generate interest savings of about RM6m for FY19E.

Maintain SELL, Minimal Impact to Earnings

We make the necessary adjustments to our earnings estimates to reflect the disposal gain and the transfer of the business. Overall we estimate the impact to be relatively muted, as the chilled dairy business represents approximately 2% of total group revenue. We maintain our SELL call with a revised DCF-derived TP of RM111.00 (from RM100.82), as we believe that valuations at current levels are still stretched.

Source: Affin Hwang Research - 10 Oct 2018