THE best analogy to equate Nestle (M) Bhd with is probably that of a strong tree trunk that can withstand any typhoon or hurricane.
Even as some stock market analysts have for quarters after quarters been retaining their “sell” rating on the global diary product manufacturer, Nestle Malaysia’s stock price has remained firm in the RM130 level for the past two years (52-week trading range of RM130.60-RM138.70), thus making it the most expensive stock in Bursa Malaysia today.
Whether this is due to the fact that its lofty share price shields it from speculative elements or that its parent company Nestle SA – the world’s largest food & beverage (F&B) company – is its controlling shareholder with a 72.6% stake in the company, Nestle Malaysia possesses an impeccable track record as a bellwether stock which is “stoutly defensive” in nature.
In the latest results review, Maybank IB Research has maintained its “sell” rating on Nestle Malaysia with a lower discounted cash flow (DCF)-based target price of RM101.20 (from RM103.35 previously) after lowering the company’s FY2022-FY2023 earnings estimates by 7%-8%.
Given margin compression from high raw material costs, Nestle Malaysia’s 4Q FY2021 core net profit of RM121 mil (-19% quarter-on-quarter [qoq]; -11% year-on-year [yoy]) brought its FY2021 earnings to RM580 mil (+4% yoy) which was 93%/95% of the research house/consensus full-year earnings expectations.
Although its 4Q FY2021 earnings had taken a beating, Nestle Malaysia has never forgotten to dole out the sweetener – a third interim dividend per share of RM1.02 was declared which brings its total pay-out in FY2021 to RM2.42 (FY2020: RM2.32).
Moving forward, AmResearch expects high raw material and freight costs to continue exerting downward pressure on Nestle Malaysia’s profitability, thus capping its earnings recovery potential.
“The easing of the input costs will likely be in phases rather than immediately as global supply chains re-adjust,” opined analyst Muhammad Afif Zulkaplly who retained an “underweight” call with a revised fair value of RM114/share (from RM115/share) based on a discounted cash flow (DCF) valuation.
Hong Leong Investment Bank (HLIB) Research opined that the heightened volatility of raw material costs and ongoing expenses related to COVID-19 would continue to pose a threat of deteriorating margins for Nestle Malaysia moving forward.
Maintaining its “sell” rating with an unchanged dividend discount model (DDM) target price of RM107, the research house further reckoned that Nestle Malaysia trades at an unreasonably high valuation level of 57.1 times its FY2022 earnings per share (EPS) and yielding an unattractive 1.8%.
“By comparison, its holding company in Switzerland (Nestle SA) trades at a cheaper 25 times FY2022 EPS while its sister company in Nigeria trades at 22.7 times FY2022 EPS,” added HLIB Research.
At 1121 am, Nestle Malaysia was down 30 sen or 0.22% to RM136.10 with 15,700 shares traded, thus valuing the company at RM31.91 bil. – Feb 23, 2022
Main photo credit: Bloomberg
