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Thursday, September 30, 2010

KLCI Stock - NESTLE / 4707 - 2010 Quarter 2

Par Value: 1.00
Market Cap : 234500000*42.02 = 9,853,690,000 (Very Large)
NTA per share : (578415-61024)/234500 = 2.21
P/BV : 42.02/2.21 = 19.01
Forecast P/E now : (42.02-1.5)/2.038 = 19.88 (High)
ROE : 69.86%
DY : 1.5/42.02*100 = 3.57% (Low)
Fixed Asset Turnover(3 year) : (2.1335+2.2302+1.9924)/3 = 2.1187 (High)
Liquidity Ratio : 890648/812088 = 1.0967 (Low)
Receivables Collection Period : (404320+389398)/2/(3908794/365) = 37 days (Good)
My Target Price : 41.34+1.5 = 42.84 (PE 22, EPS 1.8792, DPS 1.5)
My Decision : NOT BUY unless price below 41.2
My Comment : Revenue growing, good cash flow, high debt, navps increased, strong Ringgit, cocoa powder and skimmed milk powder price increasing
Technical Support Price : 39
Risk Rating : LOW
OSK Target Price : 38.53 (27 Aug 10)

My notes based on 2010 quarter 2 report (number in '000):-

- The Group registered 13.9% higher turnover than the same period last year. Domestic and exports, both performed well and contributed to the encouraging second quarter performance

- Locally, the quarter saw many marketing activities and new product launches leveraging on improved economy and consumer sentiment. Overall, the businesses performed well in this quarter with a special mention of Nestle Liquid Drinks and Chilled Dairy which achieved strong growth

- Another positive note is the robust double digit growth which was registered by the Exports business. The significant investment in production lines over the last 3 years have made additional capacity readily available to cater to the higher external demand, regionally as well as globally. The strong economic performance by the neighbouring countries, in particular Indonesia and Philippines also contributed to the higher exports for the quarter

- The operating profit increased at the same rate. The profit margin before tax declined by 10bps, slightly affected by higher financing costs stemming from an increase in local interest rates. Due to a lower effective tax rate driven by substantial investments made in the last 3 years which qualify for Halal tax incentives, profit margin after tax improved by 20bps

- For the half year ended 30 June 2010, the Group posted 8.6% higher turnover than the same period last year. Domestic sales, leveraging on improved local economy and increased consumer confidence, showed a good improvement over last year. From an exports perpective, the Group took advantage of the improving world economy by making great strides to attain a robust double digit growth for the first half of the year. This good achievement was also contributed by the higher demand from the Asean neighbouring countries which experienced strong economic growth. New coffee creamer and coffee production lines commissioned in the past 2 years have been well leveraged to meet the increased export demand

- While some commodity prices increased sharply during the half year, eg. Cocoa powder more than doubled compared to last year's first half average price and Skimmed Milk Powder escalated by more than 30%, the stronger Ringgit against US dollar helped cushion partially these increases.
Additionally. manufacturing efficiencies driven by internal improvement programmes as well as by higher export volumes helped absorb factory fixed costs. As a result, the gross profit margin ended at 33.3%, an improvement of 10bps compared to last year

- In the second quarter, the Group further intensified its marketing and promotional activities. Several new products were launched namely, Canned Nescafe Ipoh White Coffee and MAGGI Atta Whole Wheat Noodles with fibre, lower fat and no added MSG. The quarter also saw a MILO campaign with focus on PROTOMALT, a proprietary malt extract which is one of the key ingredients in MILO

- Profit before tax for the first half improved by 160 bps against same period last year was mainly driven by timing of overhead cost and the favourable leverage of the fixed cost structure. The Halal tax incentives related to the substantial capital investments made in the last three years, helped reduce the effective tax rate. As a result, the profit after tax at improved by 180bps vs previous year

- Against the last quarter, the turnover increased by 3.0%. The higher operating expenses was mainly attributed to the anticipated stronger marketing and promotional activities executed in the second quarter. As such, the profit before and after tax dropped accordingly

- Estimate next 4Q eps after 2010 Q2 result announced = 0.4271*4*1.1 = 1.8792, estimate PE on current price 42.02 = 21.56(DPS 1.5)
- Estimate next 4Q eps after 2010 Q1 result announced = 1.56+0.1491+0.0357 = 1.7448(0.1491 from adjustment between 2009 Q1 eps and 2010 Q1 eps, 0.0357 from QbQ improvement adjustment), estimate highest/lowest PE = 23.21/18.52 (DPS 1.5)
- Estimate next 4Q eps after 2009 Q4 result announced = 1.56(around 4% from 1.5002), estimate highest/lowest PE = 22.12/20.54 (DPS 1.5)
- Estimate next 4Q eps after 2009 Q3 result announced = 1.4537, estimate highest/lowest PE = 23.06/21.12 (DPS 1.3)
- Estimate next 4Q eps after 2009 Q2 result announced = 1.4537, estimate highest/lowest PE = 23.65/21.78 (DPS 1.3)
- Estimate next 4Q eps after 2009 Q1 result announced = 1.5264, estimate highest/lowest PE = 21.42/17.82 (DPS 1.3)

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