Nestle- top-line & bottom-line slideback after a strong 1Q

Results Update

for QE30/6/2011, Nestle's net profit dropped 30% q-o-q to RM107 million on the back of a 2.5%-decline in turnover to RM1.156 billion. The drop in turnover is attributed to higher sales in the immediately preceding quarter (QE31/3/2011) which include the important lunar year. This coupled with higher raw material costs and strong marketing and promotional activities incurred for the launch of a few products, led to a drop in its net profit.

Compared to the same quarter last year, Nestle's net profit increased by 6% while turnover incresed by 10%.


Table: Nestle's last 8 quarterly results



Chart 1: Nestle's last 17 quarterly results

Valuation

Nestle (closed at RM47.90 yesterday) is now trading at a PE of 27 times (Based on lats 4 quarters' EPS of 176 sen). At this multiple, Nestle is deemed overvalued.

(Note: Nestle Malaysia has outperformed its parent Nestle SA. In July 2009, I posted a piece on Nestle, recommending a switch from Nestle Malaysia to Nestle SA. (here). The latter rose from CHF40 to a high of CHF56 and it has since eased off to about CHF49. That represents a gain of 22.5% while Nestle Malaysia rose from RM32 in July to RM47.90 yesterday- a gain of 50%.)

Technical Outlook

Nestle has been rising within an upward channel, with the resistance posed by the parallel line at RM50.00. It may find support at the 10-week SMA line at RM46.00.


Chart 2: Nestle's monthly chart as at August 1, 2011_plotted on log scale (Source: Tradesignum)

Conclusion

Based on high PE multiple & limited technical upside, I believe one should take profit on Nestle.