02 May 2012
Nestle to maintain profit margin from Milo product price raise in January 2012 by 4%-5% but Government subsidies roll back and increasing commodity prices may put pressure on margins, target price RM 60.90 - Affin Research
Last week, Nestle reported a healthy set of first-quarter ended March 31 results. From the analyst briefing held last Friday, we gathered that revenue growth of 8.5% year-on-year (y-o-y) was supported by domestic sales growth of 8% y-o-y and export sales growth of 10% y-o-y.
Gross profit margin was lower by 0.6 percentage point, largely due to higher costs of key commodities (such ascrude palm oil, wheat flour and milk solids). Although the average price of cocoa beans fell by 30% y-o-y in first quarter, strong demand for cocoa powder (a byproduct of cocoa beans and a key ingredient for Milo) have driven up prices substantially.
That said, Nestle was able to offset the higher input costs via its internal savings programme, thus keeping earnings before interest and taxes margin stable at 18.3%.
Price increases are typically a last resort – Nestle recently raised prices of Milo products by 4% to 5% in January 2012. Management guided that going forward, they had no plans for another price increase this year, indicating that input costs were currently at a manageable level.
Nestle’s holding company, Nestle S.A. recently announced that they would be acquiring Pfizer’s infant nutrition business for US$11.9bil. Executive director Marc Seiler indicated that although they have no news yet on the potential impact on Nestle Malaysia, an infant nutrition division would complement Nestle’s current products range. Given that approvals for the acquisition will take another six to 12 months, any contribution from the addition of Pfizer Malaysia’s infant nutrition business would only be seen in financial year ending Dec 31, 2013 (FY13) onwards.
We also garnered further details regarding the new accounting treatment for revenue and Malaysian Financial Reporting Standards (MFRS) 112: Income Taxes. For the former, Nestle now deducts certain allowances and discounts related to trade and consumer promotions from sales, rather than classify it as cost of sales and other expenses. These allowances and discounts account for around 10% of revenue – consequently, we have adjusted our FY12 to FY14 revenue and cost of sales forecasts to account for the new method of presentation.
This, however, has no impact on operating profit and subsequent lines on the income statement. As for MFRS 112, which recognises deferred tax assets from unutilised tax incentives, management guided that the impact on the full-year effective tax rate is still uncertain. We have thus kept our effective tax rate unchanged at 16% (lower than the corporate tax rate due to halal and investment tax incentives).
Maintain add, with an unchanged target price of RM60.90. We like Nestle for its effective cost management, high dividend yields and low demand risk for its products. That said, should the Government begin rolling back subsidies, and commodity prices continue to climb, a slowdown in consumer spending and higher input costs would put pressure on Nestle’s margins.