KLCI Stock - NESTLE / 4707 - 2010 Quarter 3

Par Value: 1.00
Market Cap : 234500000*43.8 = 10,271,100,000 (Very Large)
NTA per share : (688702-61024)/234500 = 2.68
P/BV : 43.8/2.68 = 16.34
Forecast P/E now : (43.8-1.5)/1.9308 = 21.91 (High)
ROE : 66.33%
DY : 1.5/43.8*100 = 3.42% (Low)
Fixed Asset Turnover(4 year) : (2.2803+2.3247+2.2007+2.1241)/4 = 2.2325 (High)
Liquidity Ratio : 824029/623979 = 1.3206 (Low)
Receivables Collection Period : (384078+334948)/2/(4013058/365) = 32 days (Good)
My Target Price : 44.41+1.5 = 45.91 (PE 23, EPS 1.9308, DPS 1.5)
My Decision : NOT BUY unless price below 40
My Comment : Revenue lower down but still higher than preceding year, profit increased, good cash flow, strong cash, high debt but decreased, navps increasing, strong Ringgit, cocoa powder and skimmed milk powder price increasing
Technical Support Price : 43.4, 41.7
Risk Rating : LOW
OSK Target Price : 47.9 (29 Oct 10)

My notes based on 2010 quarter 3 report (number in '000):-

- For the third quarter of 2010, the Group registered a 11.8% higher turnover than the same period last year. The commendable performance was contributed by both Domestic and Exports businesses

- The good growth momentum generated by the local economy sustained the consumer demand and spending. Leveraging on the improved domestic economic situation, most of the product categories performed well and registered a satisfactory growth. This is quite evident for Nestle Liquid Drinks and Chilled Dairy which achieved double digit growth. From a channel perspective, both retail and out-of home sales enjoyed good growth

- Capitalising on the investments made in major production lines for coffee and coffee creamers in the past 2 years, the exports business continued to perform well, registering a strong double digit growth for the quarter. The strong economic growth experienced within the South East Asian countries helped generate higher demand for the Group's Halal products

- As a consequence of input cost pressures and product sales mix, the gross profit margin deteriorated by 110bps against the previous corresponding period. Nevertheless, due to less marketing and promotional activities during the quarter and timing of some fixed overhead expenses, the profit margin before tax improved by 140 bps

- For the first nine months ended 30 September 2010, the Group posted a 9.6% higher turnover than the same period last year. The continued positive economic environment helped sustain the accelerating market demand. Leveraging on the improved economic situation, most of the domestic product categories performed well. This is quite evident for Nestle Liquid Drinks and Chilled Dairy which had a double digit growth achievement. From a channel perspective, both retail and out-of home sales enjoyed good growth

- With the additional capacity for coffee and coffee creamers made in the past two years, the Export business was able to capture the higher demand overseas. This was aided by the strong economic growth experienced within the South East Asian countries. From the start of this year, exports achieved a robust double digit growth. Against the same period last year, the export business has expanded from 20.9% to 23.9% of the total Group's sales

- The Group remained focused on managing unfavourable trends in input cost. For the period under review, the average price of cocoa powder doubled and skimmed milk powder was higher by 20%. These higher material costs were partially offset by savings from manufacturing efficiencies
driven by internal improvement programmes, higher export volumes that helped absorb factory fixed costs and also aided by the stronger Ringgit. Resulting from these factors, the gross profit margin was 30bps lower that the previous period

- Whilst the turnover grew by 9.6%, the operating expenses remained flat. This was partially due to the timing of marketing and promotional activities scheduled in quarter 3 and quarter 4. The Nestle Continuous Excellence programme that is being rolled out across the organisation has also made a good impact on cost management. As a result, the profit margin before tax improved by 150bps

- The Halal tax incentives related to the substantial capital investments in the last three years helped reduce the tax rate. Against the same period last year, the net profit margin improved by 200bps

- Against the last quarter, the turnover at RM991million contracted by 5.7%. The higher operating profit margin was mainly due to strong marketing and promotional activities which took place in quarter 2

- Estimate next 4Q eps after 2010 Q3 result announced = 0.4827*4 = 1.9308, estimate PE on current price 43.8 = 21.91(DPS 1.5)
- Estimate next 4Q eps after 2010 Q2 result announced = 0.4271*4*1.1 = 1.8792, estimate highest/lowest PE = 23.15/20.22 (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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