Nestlé investing in tomorrow

Nestlé (M) Bhd (June 20, RM57.78)
Upgrade to hold from sell with revised target price of RM54.20 from RM52.40:

Nestlé's ongoing heavy capital expenditure (capex) is supporting the group's earnings momentum, particularly with an upcoming plant in Shah Alam, which should provide additional capacity.

It is also positive that export growth continues to maintain a steady double-digit pace. We raise our capex assumptions for FY12 to RM180 million (from RM139 million) and lift our terminal growth assumption by +0.5% to 1%.

Our discounted cash flow-derived target price is raised to RM54.20 from RM52.40, while 2013 net yields of over 4% provide support to the share price. Nestlé has earmarked RM180 million for capex in 2012, including additional capacity spread across its business units as well as its typical renovation, upkeep and maintenance costs.

This is double the group's capex of RM93 million in 2011. Only RM12 million of the budgeted capex was spent in 1Q12. In 2013 and 2014, the group will also invest a sizeable amount of money on a piece of land measuring 40,600 sq m which it acquired from British American Tobacco in 2010 for RM36 million.

Located adjacent to its existing Batu Tiga factory in Selangor, the piece of land was acquired together with industrial buildings and warehouses. The upcoming plant will allow the group to reorganise and optimise its manufacturing facilities, currently running at a 90% utilisation rate.

No details have been provided, but we assume capex for 2013/14 to be in the range of RM150 million to RM160 million per year, using Nestlé's existing factory in Petaling Jaya (50,342 sq m) as a gauge.

Export sales grew at a faster pace of 21% y-o-y in 2010 and 2011 compared to domestic sales growth of 4% y-o-y in 2010 and 16% in 2011 due to a low base effect.

While more than 50% of Nestle's exports are to Asean countries, there is still much potential outside Asean, given that Nestle Malaysia is being positioned as the halal food hub for the Nestlé group.

For 1Q, export sales grew 10% y-o-y, while domestic sales grew 8% y-o-y. Overall, the domestic:export contributions to total revenue in 1Q remain unchanged at 75:25. — Maybank IB Research, June 20
This article appeared in The Edge Financial Daily on June 21, 2012.