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| OSK maintains neutral on Nestle |
| Written by The Edge Financial Daily | |||
| Monday, 26 October 2009 14:17 | |||
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In a research report recently, OSK said Nestle’s target price was based on a discounted cash flow (DCF) valuation with cost of equity (COE) of 7.4%, implying 19.1 times of FY10 earnings per share (EPS). “We are keeping our earnings projection for now, and will be making the necessary revisions pending the group’s third-quarter results briefing on Oct 30,” it said. The research house said it expected a more robust quarter-on-quarter performance on the back of growing consumer confidence. “Although consumer confidence is still clouded by economic uncertainties, there are pockets of improvement in the economy, as the Malaysian Institute of Economic Research consumer sentiment index (MIER CSI) is showing indications of stabilising,” it said. OSK Research noted that the MIER CSI had jumped 48.4% to 104.5 recently, from a low of 70.4 in the second quarter of the calendar year 2008. “We expect better sales from its milk, nutrition and ice-cream division as the hot season from June to August may have fuelled sales, particularly for chilled products,” OSK said. The research house noted that Nestle had usually performed better in the third quarter, except for 2008 when there was a drastic petrol price hike. OSK added that Nestle’s management had previously hinted at higher advertising and promotion spending, and is currently focused on brand-building activities. “This, together with continuous product innovation, should translate into sales growth this quarter,” OSK said. Nevertheless, it noted that raw material prices had bottomed and had started to climb, particularly skimmed milk powder, cocoa and Arabica coffee. “We believe this would have eaten into margins, but with the company’s full cost optimisation and efficient ingredient ratio, as well as Nestle’s centralised procurement system, the group should be able to enhance margins. Moreover, improved sales will help Nestle keep its numbers healthy,” the research house said. Nestle closed at RM33.50 last Friday, down six sen.
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