Capitalising on product innovations

Business & Markets 2013
Written by of theedgemalaysia.com
Tuesday, 07 May 2013 10:25
A + / A - / Reset

NESTLE (M) BHD []
(May 6, RM63)
Upgrade to buy at RM62.44 with a revised target price (TP) of
RM67.96 (from RM59.52): Recall that in our last meeting with Nestle’s
director of finance and control Marc Seiler, he was tightlipped over the
exact amount allocated for capital expenditure (capex) in 2013 financial
year (FY13).
But he revealed that the quantum will be over RM200 million, more than
25% higher than the company’s capex in FY12. The bulk of the
allocation will be utilised to: (i) construct a new manufacturing facility in
Shah Alam to increase capacity for the production of ready-to-drink UHT
products such as Milo and Nescafe; and (ii) develop its manufacturing
capabilities for confectionery at its factory in Chembong, Negri
Sembilan.
The upgrades come at a time when Malaysia and its neighbours are expected to see rapid growth.
The first quarter of FY13 witnessed the unveiling of: (i) Nestle’s premium ice cream segment La Cremeria’s new variants,
Almond Pecan Praline and Vanilla Cashew Delight; (ii) Mat Kool children’s range of frozen confectionery’s new offering, Mat
Kool Colors; and (iii) the chilled dairy segment’s new range of Greek yogurt in natural, strawberry and peach flavours. The
continuous product innovations will ensure that Nestle remains relevant to the changing preferences of its consumers.
Nestle has also introduced Maggi Magic Meals, a new line of products positioned under its Maggi brand name. The new
product enables customers to whip up healthy and well-balanced meals easily.
In March this year, Bank Negara Malaysia (BNM) revised its growth outlook for the national economy to 5% to 6%, up from
the 4.5% to 5.5% projected when Budget 2013 was announced last September. The upward revision reflects increased
optimism in the growth prospects of the country. We we note that BNM is not alone in its optimism of Malaysia’s growth
prospects.
We upgrade our recommendation on Nestlé to “buy” with an increased TP of RM67.96, based on the dividend discount
model. Our TP implies a total upside potential of 12.5% which is short of the threshold required to call a “buy”. However, we
are making an exception to the rule in view of the following: (i) our anticipation of improved future earnings potential given our
increased optimism in the growth prospects of the local economy; (ii) Nestlé’s timely expansion which will enable it to tap
further into the growing economy; (iii) the group’s clever repositioning of its products to meet the needs of the increasingly
health-conscious and “time-deficient” urban population; and (iv) political neutrality of the group which we believe partly stems
from the nature of its products which essentially are necessities, its halal status which will ensure its continued relevance to all
Malaysians, and its foreign ownership which accords the group with political impartiality in its leadership and direction. —
MIDF Research, May 6