NESTLE (M) BHD

Target price: RM102

MAYBANK IB said the disposal of Nestle’s chilled dairy business and the Petaling Jaya factory land will yield gross cash proceeds of RM155mil (or 66 sen per share) which will be used to establish the Milo Manufacturing Centre of Excellence and repay borrowings.

“Upon deconsolidating Nestle’s chilled dairy business and adjusting for interest cost savings, our FY19-FY20 earnings estimates are tweaked lower by circa 1%.

“We maintain the ‘sell’ rating with a lower discounted cash flow derived target price of RM102 (weighted average cost of capital of 6.2%, long-term growth of 2.5%) on lofty valuations.

“Nestle currently trades at 47.5 times 2019 PER compared with the consumer sector’s average of 28 times,” the research house said.

Additionally, the completion dates for the disposals will be completed in two stages of which are the chilled dairy business by Jan 1, 2019; manufacturing business and PJ factory by July 1, 2019.

Nestle stands to receive a total gain on disposal of RM27mil over FY18 and FY19.

The proposed disposal is expected to be completed by end-July 2019 and is not subject to shareholders approval, it noted.

“We believe the majority of the RM27mil gain on disposal will only materialise in FY19. As such, we leave our FY18 earnings unchanged but marginally lower our FY19FY20 earnings estimates by circa 1% after deconsolidating Nestle’s chilled dairy business revenue and adjusting for higher interest cost savings,” Maybank IB said.

There are several risk factors for our earnings estimates, price target, and rating for Nestle Malaysia, the research house said.

“A spike in raw material prices may impact earnings for Nestle Malaysia.

“Additionally, sharp appreciation of the US dollar against the ringgit will also affect its earnings, for about 50% of its raw material requirements are denominated in the US dollar. Its export sales, which account for about 20% of total sales, should provide some natural hedge,” it said.