Nestle M- time to take profit

Background

Nestle (M) Bhd ('Nestle M') manufactures and markets more than 300 products in Malaysia. Its brand name such has MILO, NESCAFÉ, MAGGI, NESPRAY and KIT KAT are household names and enjoyed for generations. For more on Nestle (M), go here.

Nestle M is 72.6%-owned by Nestle SA.

Recent Financial Results

In its latest available quarterly result, Nestle M's net profit increased by 29.9% q-o-q or 6.4% y-o-y to RM100.4 million while turnover increased by 1.2% q-o-q or 6.1% y-o-y to RM984 million. The 8 quarterly results are shown below in table form & chart form.


Table 1: Nestle M's 8-quarterly results


Chart 1: Nestle M's past 8 quarterly results

Technical Outlook

Since its listing in 1990, Nestle M's share price has been rising. One can draw an upward channel to envelope the share price movement (see Chart 2). It is now at the upper boundary of that channel, with a potential upside of RM33.00. To rise to that level, Nestle M will have to make a new high. It is presently sitting at the all-time high of RM32.00- the third trip to this level in the past 2 years. Will it surpass the all-time high? Or, are we looking at a potential reversal in the form of a triple top? This game of brinkmanship has been going on for 3 weeks, since June 12 (see Chart 3).


Chart 1: Nestle M's daily chart for the past 19 years (Source: Tradesignum)


Chart 2: Nestle M's daily chart as at July 9, 2009 (Source: Quickchart)

Valuation

Nestle M (closed at RM32.00 yesterday) is now trading at a trailing PE of 22 times (based on last 4 quarters' EPS of 148 sen). Many own this stock for its dividend but its dividend yield is only 4.1%. Nestle's dividend payout for the past 5 years are 100.9 sen (FY2004); 106.49 sen (FY2005); 229.07 sen (FY2006); 215.64 sen (FY2007); and 130 sen (FY2008). The dividend payout for FY2007 includes a special dividend of 61.2 sen that was announced together with the 1Q2008 results. I do not think there will be any special dividend for FY2008 since the company was silence when it announced results for 1Q2009 in mid-April.

Comparison with Nestle SA

I have appended below the chart of Nestle SA and a chart comparing its share price movement with other giant foods companies (Kraft Food, Unilever & Groupe Danone). We can see that Nestle SA made a high of about CHF55 in December 2007 & corrected back in 2008. Some recovery in the share price was seen in the past few months for all 4 companies. One would be very surprise by this timid rebound among the global food giant when compared to the stunning rise of our Nestle M.


Chart 4: Nestle SA's 5 years chart


Chart 5: Nestle & 3 other giant food companies' chart for past 5 years

Nestle SA closed at CHF41.14 yesterday. From the financial overview below, we can see that Nestle SA's EPS for FY2008 was about CHF2.82. Thus, its trailing PE is about 14.6 times only.


Table 2: Nestle SA's Financial Overview for FY2008 & FY2007

Conclusion

Based on the above, Nestle SA is a cheaper stock than Nestle M. In addition, the parent's share price has corrected somewhat while Nestle M is trading at its all-time high. Even if Nestle M can break above the all-time high of RM32.00, its rise may be capped by the upper boundary of the channel at RM33.00. As such, it may be a good idea to slowly take profit on Nestle M.