Mainstream
Bursa’s big cap stocks in play
Cheah Chor Sooi 
Some of the many brands under Nestlé, which saw its share price in Bursa Malaysia trading at historical high
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The market is abuzz with the sudden interest in big cap stocks on Bursa Malaysia recently. Some of the key counters which saw renewed investor interest include Nestlé Malaysia Bhd and Dutch Lady Milk Industries Bhd. Together with Panasonic Manufacturing Malaysia Bhd, British American Tobacco Malaysia Bhd (BAT Malaysia) and Fraser & Neave Holdings Bhd (F&N Malaysia), these counters form the five ‘most expensive’ stocks on Bursa for most retail investors.

Renewed interest from foreign funds coupled with Bank Negara Malaysia’s raising of the overnight policy rate by 25 basis points is said to be the main cause of the optimism surrounding other big cap counters. What is even more curious is that Nestlé Malaysia and the other four most expensive counters, in absolute terms, on Bursa are all listed under Bursa’s Consumer Product sector.

Institutional investors usually study a counter’s PE ratio before determining whether a share price is expensive, overpriced or otherwise. For most retail investors, buying into the shares of these companies under current market price are deemed as expensive as it would require a heavy capital investment. But for institutional investors, these counters are not expensive as their PE ratio is reasonable and within the sector average.

Since the announcement of the rate hike by the central bank, Public Bank Bhd had risen sharply by almost 5% to RM21.98 on Jan 30, making it Malaysia’s most expensive banking stock by share price alone. It is the second largest bank by market capitalisation, after Malayan Banking Bhd (Jan 30: RM10.10).


Bursa Malaysia’s 10 ’Most Expensive’ Stocks

Nestlé Malaysia’s current sharp rise in its share price has made it the most expensive stock on Bursa Malaysia (See table on page 16). On Jan 30, the counter closed at RM113.30, trading at its historical high.

Given that its latest dividend yield at 3.45% is fairly reasonable, the counter has fared better in terms of capital gains, having appreciated 12.1% year-to-date (YTD) from RM101.10 (as of Jan 2) and 49.1% over a one-year period (Jan 30, 2017: RM75.98). Nestle Malaysia trailing 12 months PE multiple stands at 45.87 is considered relatively high compared to the sector average of 36.30.  

Dutch Lady is the second most expensive stock at RM63.10, appreciating 3.8% YTD (Jan 2: RM60.80). As at Jan 30, with a PE ratio of 30.01, Dutch Lady share price has gained 15.57% compared with its price a year ago (Jan 30, 2017: RM54.60). Dutch Lady is a thinly traded stock but on Jan 19, the counter saw the heaviest trading with over 515,100 shares changing hands.  

At RM34.70, Panasonic Malaysia is currently the third most expensive stock in Bursa Malaysia. However, YTD, its share price had declined 10% (Jan 2: RM38.52). In fact, the stock has been trending lower since hitting a five-year-high of RM40.28 on Nov 6.

BAT Malaysia, whose current share price is about 10% lower YTD at RM34.18 (Jan 2: RM37.94), is still considered expensive for retail investors to buy. BAT has a PE ratio of 13.92, while providing a dividend yield of 5.2% in its latest financial year.

F&N Malaysia closed at RM29.16 on Jan 30, is also considered expensive for Bursa punters. So far this year, its share price has risen 8.6% (Jan 2: RM26.86). Compared to a year ago, the counter appreciated 25% (Jan 30, 2017: RM23.32). Of the five stocks, F&N Malaysia is the most actively traded counter, with over 9.89 million shares traded in January.

As for Nestlé Malaysia, the decline in net profits could be the result of hedging of key commodities used by the company. “We believe this is due to the continuing impact of the group being locked in unfavourable hedging positions on key commodities, being sugar, cocoa, coffee and milk powders,” says Kenanga Research’s analyst Clement Chua. “This could also have been further aggravated by high forex positions as about 50% of the group’s raw materials is imported.”

Despite this, some investors see Nestlé Malaysia as an illiquid counter, given the tight control by its parent company Nestlé SA (with 72.6% stake while the second biggest shareholder is the Employees Provident Fund at 7.1%).

However, TA Securities Research analyst Damia Othman says that the high shareholdings of institutional investors prevents volatility on the counter. “Uptrend movement is determined by increasing demand from other investors,” Damia says.

 

Nestlé is focusing on long term

Now that Nestlé Malaysia’s star is rising, its phenomenal share price rise on Bursa is creating renewed optimism on Bursa Malaysia. In its recent nine-month FY2017 results, Nestlé Malaysia’s revenue grew by 4.5% to RM3.98 bil (9MFY16: RM3.81 bil) but its net profit dwindled 11.3% to RM570.2 mil previously.

Krügel says the company wants to focus on its long-term goals

Nestlé Malaysia’s CFO Martin Peter Krügel says the company wants to focus on its long-term goals while delivering short-term gains. “This strategy has certainly paid off, enabling us to fuel growth for the group even in challenging times,” he says. “Moving forward, as we operate in an increasingly competitive business landscape, we remain focused on internal improvements to maintain prudent cost management and improve efficiency and productivity.”

Fascination with the ‘upward march’ of Nestlé Malaysia’s stock price – particularly since the fourth quarter (Q4) of last year – has prompted Financial Planning Association of Malaysia CEO Linnet Lee to draw an equivalent of owning 10 lots (10,000 shares) of the multinational stock with owning a high-end 1,000 sq ft condominium in the Kuala Lumpur City Centre (KLCC) central business district.

Her argument is simply that certain blue-chip stocks can serve as an asset class for the man-on-the-street to add to his investment portfolio.

“This is not something beyond the reach of far-sighted retail investors as Nestlé Malaysia was trading at a mere RM24.70 10 years ago (as of Jan 3, 2007),” Lee says. “Dividend yield aside, there is capital appreciation as in the case of acquiring real estate assets.”

While the point Lee drove home is worthy of food for thought, Nestlé Malaysia would probably be out-of-bounds for many retail investors. Since breaching the RM100 mark on Dec 7, the stock has been scaling new heights almost every other day.

Last traded at RM113.30 (as of Jan 30), the company boasts a market capitalisation of RM26.73 bil. Year-to-date, the fast-moving consumer goods (FMCG) maker has outpaced the benchmark FBM KLCI with a +12.1% (Jan 2: RM101.10) vs +4% (Jan 2: 1,782.70) return.

Nestlé Malaysia’s current ‘high-flying’ trend can be attributed to the stock (i) being added to the MSCI Malaysia Index effective Nov 30 (as the index went through a semi-annual rebalancing exercise); (ii) included in the KLCI index (also effective Nov 30), and (iii) opening of central procurement hub in Malaysia for Nestle SA.

Nestlé Malaysia was featured in the list of MIDF Research’s Top 10 Net Money Outflow Stocks with selling on strength following its 5.3% surge during the week of Jan 22-26 which contributed to outflows of RM7.1 mil (Jan 15-19: RM10.1 mil).

 

Attractive despite high stock price

Even at its lofty share price currently, some investors view Nestlé Malaysia as attractive to investors – in particular, local institutional funds and foreign investors.

According to TA Securities’ Damia, this is mainly due to the country’s economic performance being in positive correlation with earnings direction of stapled foods companies. “Hence, considering that Malaysia’s gross domestic product and private consumption were strong in 2017, we opine that this will reflect positively on Nestlé Malaysia’s earnings outlook,” she says.

Based on Nestlé Malaysia’s Q3FY17 results, TA Securities Research is the only research house with a bullish outlook on the stock. In its Nov 24’s company update, the research house upgraded Nestlé Malaysia to a buy rating with a higher target price of RM120.50 (from RM92.76 previously).

Three other research houses rated the stock “hold” with target prices of RM86.90 (Kenanga Research); RM85.18 (Hong Leong Investment Bank Research) and RM82.76 (MIDF Research).

Kenanga Research opined that although Nestlé Malaysia’s sales growth is sustained by strong product development, its earnings may still be clouded by a slower-than-expected recovery of input costs.

“We believe this is due to untimely hedging positions,” says Chua who nevertheless raised the company’s target price from RM81.10 on a higher valuation following its inclusion into the MSCI Malaysia Index.

However, Nestle Malaysia’s management believes an easing of production costs can be realised within the first half of this year amid the recovery and strengthening of the ringgit.

 

Sustainable growth prospect

Moving forward, TA Research’s Damia projects Nestlé Malaysia to continue enjoying double digit earnings growth between FY17 and FY19 on the back of downtrend in raw material prices which is expected to reduce costs of goods sold; topline growth supported by increase in private consumption level; strengthening ringgit given Nestlé Malaysia’s position as a net importer; and continuous efforts from the management in implementing long-term growth strategy (eg a second national distribution centre is expected to open in Q2FY18 with 88,000 pallets of storage or 20% larger than current national distribution centre).

While listed multinational companies are often criticised for their ungenerous demeanour towards their investors – i.e. rewarding investors via bonus issue or undertaking stock split exercise – Damia does not see this as an issue considering the current share price is perceived to be affordable to the majority of Nestlé Malaysia’s shareholders who are institutional funds or foreign investors.

Over the short-term, Damia is optimistic of Nestlé Malaysia’s FY17 earnings outlook on the back of effective marketing strategies, strategic product pricing while maintaining competitiveness and continuous cost rationalisation efforts to support earnings margin.

As for the mid-term, she foresees positive impact from the downtrend in commodity prices, and strengthening of ringgit given that Nestlé Malaysia is a net importer, hence this will support earnings margins for in 2018.

On the longer term, Damia is confident that Nestlé Malaysia’s Fuel the Growth strategy is able to further enhance the company’s efficiency across its supply chain while enabling it to re-invest costs savings into innovations and renovating the group’s product portfolio towards achieving sustainable earnings growth.

 

Factors supporting sustainable earnings

Nestlé Malaysia is the global hub of Halal Nestlé products, with its products exported to over 51 countries and it accounts for about 20% of Nestlé’s revenue contribution. The company also has additional distribution centre by Q2FY18 to support increasing demand. Nestlé products are also being made available on online market places like Lazada and 11th street when Malaysia, further extending its distribution reach.

“Downside risks to Nestlé Malaysia share price includes a sudden uptrend in commodity prices, lower-than-expected topline growth from both domestic and exports as well as higher-than-expected production costs,” adds Damia. 

Expensive or overvalued?

How investors determine whether a share price is expensive depends on several factors such as its price/earnings ratio (P/E ratio), earning per share (EPS) and the required capital investment.

While institutional investors may still invest in big-cap stocks, retail investors may shy away as it requires a heavy capital investment. Hence, it all depends on the financial ability of the buyer when investing. A high share price does not necessary mean the share is expensive.

Theoretically, a stock’s P/E ratio is the most commonly used indicator in determining whether a share price is expensive or overvalued. It speaks of how much investors are willing to pay per ringgit of earnings for a given company. But P/E ratio is never evaluated in isolation.

A P/E ratio of 20 suggests that investors in the stock are willing to pay RM20 for every RM1 of earnings that the company generates over a year. However, this is a simplistic way of viewing the P/E because it fails to take into account the company’s growth prospects.

The P/E ratio is a much better indicator of the value of a stock than the market price alone since it allows investors to make a better apples-to-apples comparison. For example, all things being equal, a RM10 stock with a P/E of 80 is much more “expensive” than a RM100 stock with a P/E of 15.

That being said, there are limits to this form of analysis – it would be insufficient to compare the P/E’s of two companies without considering factors such as company growth potential and the average P/E ratio for the sector in which a company operates.

A company that has a very high P/E ratio, above the sectoral average, is typically said to be overvalued.



This article first appeared in Focus Malaysia Issue 270.