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BIMB SECURITIES RESEARCH

MARKET INSIGHT
PP16795/03/2013(031743)

Wednesday, 9 May, 2012

Initial Coverage

Nestle (Malaysia) Berhad


The Preferred Choice
Stock Data Bloomberg Ticker Market Cap Issued shares 52-week range (H) 52-week range (L) 3-mth avg daily volume Free Float Shariah Compliant NESZ MK 13,132.0 Equity 234.5 57.34 46.48 11,206 17.2% Y Altman Z-score YTD price chg YTD KLCI chg Beta Major Shareholders Nestle SA EPF 12.1 -0.4% 3.9% 0.5 72.6% 9.8%

Buy
Price Target Price RM56.00 RM60.20
Nestle, a global player with popular brands namely Milo, Nescafe, and Maggi is celebrating its 100 th year in Malaysia. Being a staple food producer, the companys products are synonymous to the Malaysian way of life. Reflecting its markets prominence, the companys track record is unblemished. At current price, Nestles upside potential is limited, however we believe the companys strong fundamentals will attract longer term investors given its earnings and dividend record. We are initiating coverage on Nestle with a BUY recommendation premised on a target price of RM60.20. Continuous innovation. One of Nestles strength in promoting its products is through ongoing product innovation to convert consumer insights by introducing new product for customers in different parts of the world with differences in taste and preferences. Nestle is to leverage on some of its strong brands namely Milo as growth catalysts going forward. Already it had launched several sub-brands under the Milo brand name which had garnered good response. Proven track record. For the past eight years, Nestle has been consistently delivering positive net earnings with impressive CAGR of 12.9%. We believe the growth momentum is set to continue albeit at a slower rate due to rising commodity prices. About 70% of Nestle total cost of sales is made up of imported commodities such as cocoa, milk, wheat, sugar, and etc, and most of these commodities prices have seen exponential increases since Oct 2010. Nonetheless, we believe Nestle remains appreciated and well followed for its dividend yield. Earnings growth intact. Despite the increase in capacity and sales, we reckon prospective net earnings to be flat attributed to the increase in raw material prices hence the narrowing margins. We have projected a 5.6% increase in revenue and net earnings to grow by 7.3% for FY12. Thanks to Governments introduction of the new Malaysia Remuneration System to increase civil servants pay by 7-13% as well as the minimum wage policy of between RM800 to RM900 for some 3.2m workers in the private sector in 2012 will certainly buoy demand going forward hence the better figures for FY13. View & Valuation. We have a Neutral rating on Nestle with a target price of RM60.20 based on DDM valuation. The terminal growth of 1% is justified by its solid fundamentals, strong and visible growth prospect in the HALAL market, and yield appeal with an established high dividend payout track record. Coupled with dividend yield of 3.3% and share price upside of 7.5%, the stock could offers potential total return of 10.8%, hence we initiate coverage on Nestle with a BUY recommendation.

Share Performance (%) Absolute vs. KLCI Financial Highlights FYE 31 Dec 2009 Revenue 3,744.2 (RMm) EBIT 461.0 Pretax profit 440.3 Net Profit 351.8 EPS (sen) 150.0 EPS growth (%) 3.2% PER (x) 37.3 DPS (sen) 150.0 Div. Yield (%) 2.7% NTA/share (RM) 2.16 EBIT margin Pretax margin Effective tax rate ROE ROA Net Gearing (x) Growth Turnover EBIT Pretax profit Net profit Share Price Chart
60.00 58.00 56.00 54.00 52.00 50.00 48.00 46.00 44.00 42.00 40.00 Apr-11

1mth 0.2 10.7

3mth 0.6 (1.8)

12mth 20.3 10.7

2010 4,026.3 487.5 465.7 391.4 166.9 11.3% 33.6 150.0 2.7% 2.36 12.1% 11.6% 16.0% 66.3% 22.4% 0.59

2011 4,246.7 579.4 558.8 427.1 182.1 9.1% 30.7 180.0 3.2% 2.52 13.6% 13.2% 23.6% 67.5% 22.5% 0.44

2012E 4,485.1 580.4 559.0 458.4 195.5 7.3% 28.6 185.0 3.3% 2.63 12.9% 12.5% 18.0% 68.9% 23.0% 0.65

2013E 5,073.3 628.4 607.0 497.8 212.3 8.6% 26.4 202.0 3.6% 2.73 12.4% 12.0% 18.0% 72.2% 24.7% 0.52

12.3% 11.8% 20.1% 65.0% 20.9% 0.63

-3.4% -0.8% -0.2% 3.2%

7.5% 5.7% 5.8% 11.3%

5.5% 18.9% 20.0% 9.1%

5.6% 0.2% 0.0% 7.3%

13.1% 8.3% 8.6% 8.6%

Jun-11

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The Research Team research@bimbsec.com.my 03-26918887 ext 1

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9 May 2012 Overview

Initial Coverage: Nestle Malaysia Bhd

Nestle, which is headquartered in Switzerland, began operation in Malaysia in 1912 as a simple trading company that introduced MILKMAID Condensed Milk in Penang and later established Nestle House in Brickfields, Kuala Lumpur in 1939 to centralised all its operations under one roof. Nestle Malaysia now manufactures its products in seven factories and operates from its head office in Mutiara Damansara, with six sales offices nationwide and one national distribution centre. Nestle Malaysia is a biggest HALAL producer in the Nestle world and HALAL Centre of Excellence for the Nestle Group. Nestle is synonymous with the quality, innovation and creativity to meet Malaysian tastes and preferences. Its brands and products are now a meaningful part of Malaysians lives and trusted household names as a products of health and wellness for the older as well as younger generations.

Figure 1: Sales by Product Breakdown - FYE2011

Confectionary, 3.8% Prepared dishes, Cooking aids & Others , 17.5% Beverages, 49.3% Milk, Nutrition & Ice cream, 29.4%

Source : Company

Products Categories Beverages. This segment is split between Powdered beverage and Ready to Drink (RTD). Nestles leading brands, Milo and NESCAFE are the market leaders, with over 90% and 80% share of their respective chocolate drink and instant coffee. Last year, Nestle has launched Nestea, Milo Sejuk, and Nescafe Menu Kopi O that were well received by the market.

Milo

NESCAFE Coffee

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9 May 2012

Initial Coverage: Nestle Malaysia Bhd

Milk, Nutrition and Ice cream. Nestle milk segment is essentially divided into growing up milk, full cream or filled milk and adult milk such as Nespray, Neslac, Nesvita, Nutren and Omega Plus. The Nutrition segment is divided into Healthcare Nutrition under the brand name Nutren and Performance Nutrition under the Powerbar range. As for ice cream segment, the product is divided into 3 product types i.e. (i) cone ice cream, (ii) popsicles and (iii) take home tubs. As for Nestles chilled dairy segment which has established in 1997 in Malaysia, it carries the Nestle Bliss Low Fat Yogurt drink and Nestle Bliss Fat Free Yogurt.

Milk and Nutrition

Ice cream

Chilled Dairy

Nutrition

Prepared dishes, Cooking aids and Others. This segment is split into 3 main categories, which are Noodles, Sauces and Meal Solutions. The main revenue generator for this segment is Maggi Instant Noodles which dominate the market with over 50% of market share. Nestle also manufactures packaged soups, frozen meals, prepared sauces and flavourings under the segment. They market and sell this products segment under a brand such as Maggi noodles, Maggi Tastylite, Maggi chilli sauce, Maggi soya sauce, etc.

Maggi noodles

Maggi chilli sauce, etc

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9 May 2012

Initial Coverage: Nestle Malaysia Bhd Confectionery. The range of confectionery products is essentially Nestles range of chocolate bars, namely KIT KAT and Nestle Crunchy Bite Wafer. With a view to be the Chocolate brand of choice in Malaysia, the company has increase the brands availability and in-store visibility and introducing smaller packs to entice consumers with the lower entry price. To date, Nestle Crunchy Bite Wafer that was launched in July 2011 has shown positive results and has exceeded initial sales projections.

KIT KAT

Nestle Crunch

Continuous innovation. In order to maintain its market leadership, ongoing product innovation is a must

to convert consumer insights by introducing new product for customers in different parts of the world with differences in taste and preferences. To replicate its earlier success in launches of Milo Sejuk, Nestle Crunchy Bite wafer, Nestea Ice Lemon Tea and Nescafe Dolce Gusto, the company recently has launched three new taste of Milo i.e. Milo less sweet, Milo Hi-Fibre and Milo Cereal. Milo commanding a 90% market share in Malaysia has gained a reputation as a health drink for the younger as well as older generations and is slated as a growth catalyst going forward. With such strong branding and history in the food industry, Nestles products will continue to sustain demand for its key brands. CAPEX plans. Nestle has budgeted about RM180m for capital expenditure in 2012. Management highlighted that a large portion of its CAPEX is for innovation and increasing the capacity which are currently running at 80% - 90% and the remainder will be utilised to maintain and upgrading of its manufacturing facility in Shah Alam that it has purchased from British American Tobacco for RM36m in October 2010. The increase in capacity allows the group to expand its export market, mainly within ASEAN, as well as providing contingency support to Ivory Coast and Thailand. Commodity prices. As bulk of Nestles raw materials are commodity-based namely coffee, cocoa powder, milk solids, sugar and wheat, prevailing price volatility could be detrimental on its profit margins. In view of this, we believe there could be some margin compression in FY2012. Nevertheless, Nestle is able to mitigate such negative impact via a cost efficiency programme i.e. Nestle Continuous Excellence initiatives (NCE), and productivity improvement, as a result able to maintain its EBIT margin stable at 13.6% in FY011. Moreover, we believe Nestle being one of the worlds largest bulk purchasers will have strong bargaining power to minimise the impact of prospective increase in commodity prices. Otherwise, Nestle may increase its selling prices as did in Jan 2012, when it adjusted the selling price of Milo by +4-5% as a last resort. In a recent analysts briefing, management did mention that there are no plans for another price hike in the immediate future, showing that input costs are currently at a manageable level.

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9 May 2012

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Figure 2: Commodity

Source: Bloomberg
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Initial Coverage: Nestle Malaysia Bhd

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9 May 2012

Initial Coverage: Nestle Malaysia Bhd Riding on its HALAL certification. Nestle Malaysia as a HALAL producer has the competitive advantage over its competitors who are not HALAL certified (although this certification is not mandatory and is voluntary). The effect is more pronounced now that Nestle is exporting to over 50 countries worldwide especially to the Middle East and South-East Asian countries with large Muslim population. With an estimated global Muslim population of 1.9bn by 2020, Nestle is set to benefit exponentially. In FY2011, export sales represent 25% of total sales entailing 99% to sister company with the balance sold directly to Thailand and Vietnam. Growth strategy. Nestle growth strategy moving forward is to capitalise on product innovation and renovation as part of its continuous program. In the move to drive future growth and to capture new market segments, Nestle Malaysia has recently launced several new products from the family of Milo to leverage on this popular brand name.

Figure 3: Milestone HALAL Nestle Malaysia 1980 1992 1994 1997 2004 2009 2010 Established internal HALAL committee Formal implementation of HALAL policy HALAL certification by JAKIM Established Nestl HALAL Guidelines for inter-market supply for the Nestl Group Contributed towards the Malaysia HALAL Food Standards HALAL exports to >50 countries worth RM689 million Biggest HALAL producer in the Nestl world

Source: Company/BIMB Securities

Figure 4: World Population (1990 2030): Muslim versus Non-Muslim


Billion
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1.3 2000 Muslims

1.8 2010 Non-Muslims

1.9 2020

2.2

2030

Source: HALAL Industry Development Corporation/BIMB Securities

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9 May 2012 Performance Highlights

Initial Coverage: Nestle Malaysia Bhd

Solid track record. Nestles earnings record is second to none and has consistently registered growth in its revenue and profit for the past 22 years. During the period, the group has enjoyed an 8-year revenue CAGR of 16.9% and an 8-year net profit CAGR of 12.9%. Most remarkably, the company remained profitable and has been able to rebound swiftly following the 1998 and 2003 crisis. Figure 5: Resilient Pre-tax Profit and Net Profit (FYE2001 FYE2011)
RMm 600.0 500.0 400.0 300.0 200.0 100.0 0.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

PBT 106.0 158.4 174.9 185.0 204.9 225.9 237.1 253.9 135.3 242.7 255.0 264.7 234.2 202.1 297.2 331.4 363.3 395.3 441.4 440.3 465.7 558.8 PAT 64.9 99.5 116.5 134.4 149.3 161.9 176.6 180.0 125.4 240.7 202.5 203.9 182.6 162.0 220.4 266.8 264.2 292.0 340.9 351.8 391.4 427.1

Note: FYE2011 is not comparable due to new financial reporting standard - MFRS

Source: Company/BIMB Securities

Figure 6: Revenue Trend (FYE2003 FYE2011)


4500 4000 3500 3000 2500 2000 1500 1000 500 2003 2004 2005 2006 Revenue 2007 2008 2009 2010 2011 y-o-y change (%) -3.4% -6.0% 9.2% 7.8% 4.7% 4.3% 5.5% 4.0% -1.0% 13.5% 7.5% 14.0% 9.0% RMm 19.0%

Note: FYE2011 is not comparable due to new financial reporting standard - MFRS

Source: Company/BIMB Securities

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9 May 2012

Initial Coverage: Nestle Malaysia Bhd

Figure 7: Earnings Trend Net Profit and Margin


450 400 350 300 250 200 150 100 50 0 2003 2004 2005 2006
Net Profit 6.1% 8.5% 7.6% 8.1% 8.5% 8.8% 9.4% 9.7% 10.1%

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Note: FYE2011 is not comparable due to new financial reporting standard - MFRS

Source: Company/BIMB Securities

Figure 8: DPS and Dividend Yield based on current price (FYE2003 FYE2011)
250.0 4.0%

3.4%
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Note: FYE2011 is not comparable due to new financial reporting standard - MFRS

Source: Company/BIMB Securities

Recommendation
Positive outlook. We expect Nestle to register net earnings of RM458.4m and RM497.8m for FY12 and FY13 respectively driven by growth in all products segment especially in confectionery, Nestle liquid drinks, chilled dairy and ice cream. Financial leverage is manageable with net gearing of 0.3x as at 1QFY12 with strong interest cover ratio of over 37x. Apart from that it also has an impressive track record with average ROE of 56% over the past 9 years. We expect Nestles ROE to stay above 65% for the next 3 years. Just to note that the revenue forecasts are adjusted in line with the new accounting treatment adopted with effect from 1st Jan 2012. Under this new presentation, certain allowances and discounts related to trade and consumer promotions are deducted from sales, rather than classify it as cost of sales and other expenses in line with Nestle SA Group policy and as general practice applied by consumer goods companies. Initiate with BUY recommendation. Our target price of RM60.20 is based on a DDM valuation method with assumption of discounted rate to be 6% and terminal growth of 1%. Based on this target price the stock is to trade at 30x FY12 PER, 20.4x FY12 PBV with an implied gross dividend yield of 3.3%. The valuation is justified based on its resilient growth fundamentals, visible and strong growth prospect within the HALAL market, and established high payout track record. Coupled with dividend yield of 3.3% and share price upside of 7.5%, the stock could offers potential total return of 10.8%, hence we initiate coverage on Nestle with a BUY recommendation.

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Figure 10: Historical PE BAND

Figure 11: Relative Performance

Figure 9: Historical 3-year PE Chart

Nestle (M) Bhd PE_RATIO Aug-10 -1 Stdev Oct-10 Dec-10 Feb-11 Avg Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12
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30.1X 17.2X 12.9X 21.5X 25.8X

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Initial Coverage: Nestle Malaysia Bhd

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9 May 2012

Initial Coverage: Nestle Malaysia Bhd

Figure 12: Dividend Yield based on historical price


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Earnings Estimates
FYE 31 Dec (RMm) Revenue Pretax profit Net profit EPS (sen) EPS growth (%) DPS (sen) NTA/ share (RM) Net gearing (x) PER (x) P/NTA (x) Div. yield (%) EV/ EBITDA (x) ROE (%) Interest Cover (x) 2009 3,744.2 440.3 351.8 150.0 3.2% 150.0 2.16 0.63 37.3 25.9 2.7% 24.6 65.0% 21.9 2010 4,026.3 465.7 391.4 166.9 11.3% 150.0 2.36 0.59 33.6 23.8 2.7% 22.9 66.3% 22.5 2011 4,246.7 558.8 427.1 182.1 9.1% 180.0 2.52 0.44 30.7 22.2 3.2% 19.7 67.5% 27.7 2012E 4,485.1 559.0 458.4 195.5 7.3% 185.0 2.63 0.65 28.6 21.3 3.3% 19.7 68.9% 27.1 2013E 5,073.3 607.0 497.8 212.3 8.6% 202.0 2.73 0.52 26.4 20.5 3.6% 18.2 72.2% 29.4

Balance Sheet
FYE 31 Dec (RMm) Non Current Assets Current Assets Total Assets Current Liabilities Non Current Shareholders' Fund Liabilities Equity & Liabilities 2008 778.6 881.8 1,660.4 1,030.5 114.2 515.8 1,660.4 2009 955.0 757.7 1,712.7 698.8 446.8 567.2 1,712.7 2010 994.8 783.9 1,778.7 720.9 444.4 613.3 1,778.7 2011 996.2 1015.1 2,011.3 914.7 443.8 652.7 2,011.3 2012E 1058.8 918.3 1,977.1 856.0 443.8 677.3 1,977.1

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9 May 2012
DEFINITION OF RATINGS BIMB Securities uses the following rating system:

Initial Coverage: Nestle Malaysia Bhd

STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months. TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain. NEUTRAL Share price may fall within the range of +/- 10% over the next 12 months TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels. TRADING SELL Share price may fall by more than 15% in the next 3 months. SELL Share price may fall by more than 10% over the next 12 months. NOT RATED Stock is not within regular research coverage. SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analysts coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analysts coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analysts coverage universe, is expected to underperform the relevant primary market index over the next 12 months Applicability of ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Disclaimer The investments discussed or recommended in this report not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgements as of this and are subject to change without notice. BIMB Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2691 8887, Fax: 03-2691 1262 http://www.bimbsec.com.my

Kenny Yee Head of Research

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