Some companies seldom surprise investors, and in the case of Nestlé (M) Bhd, this is a good thing.
Fuelled by stable and consistent earnings, Nestlé has been a cornerstone defensive stock in the Malaysian market over the past two years, despite volatile external factors and growing domestic uncertainties.
Since 2014, Nestlé has averaged a return on equity of at least 70%.
Nestlé, the winner of Company of the Year in 2016, continues to show its dominance this year, taking the top spot for best three-year ROE.
The consumer product conglomerate, which has many household brands in its portfolio, has consistently made an appearance in the top 20 list since the The Edge Billion Ringgit Club awards began in 2010.
For the first financial quarter ended March 31, 2017, Nestlé posted a net profit of
RM230.43 million on revenue of RM1.37 billion.
This marks a 4.45% year-on-year increase in net profit and 4.42% y-o-y growth in revenue. While the quantum is not huge, it marks yet another quarter of steady growth for the group, despite the fact that many consumers have become more prudent in their spending. Many Malaysians would still want that cup of hot Milo or Nescafé to start the day in good and bad times.
In terms of financial performance, last year was probably a milestone year for Nestlé. Group revenue crossed RM5 billion, booking a total turnover of RM5.1 billion.
The company has been working hard over the years to continuously improve cost efficiencies as a way to enhance profitability. It is worth noting that cash flow after investments grew 44%, driven by optimisation of the group’s working capital.
Despite its dominance in the consumer market, Nestlé continues to look for fresh sources of growth — exports, particularly halal products. It has been expanding capacity to cater for the export markets. The group draws about 21% of its sales from exports. Last year, Nestlé’s export revenue expanded 9.6% y-o-y to a record RM1.107 billion, which is about 20% of its total revenue.
With such steady earnings, Nestlé last year paid out an all-time-high dividend of RM2.70 per share. In turn, its share price climbed to a record high of RM85 on June 30.
Currently, all nine analysts covering Nestlé have “hold” calls on the stock, with an average 12-month target price of RM80.83, although it has been hovering near its record high.
“We feel reassured [that] the group’s position as the market leader in F&B [will] be maintained. The group’s strategy to emphasise product innovation sits well with the current market landscape, where demand can be driven by global fads, regulatory changes and shifts in festive seasons, particularly within the country,” writes Kenanga in a recent research report after attending a presentation by Nestlé at the Malaysian International Food and Beverage trade fair.
“We believe the introduction of premium products can also better position the group to ride the constant volatility in commodity prices without resorting to price increases with their higher margin levels,” adds the report.
Nestlé has never been complacent. The group has ventured into e-commerce in order to cater for the changes in consumer behaviour. It expected sales to hit RM30 million by end-2016.
One of the bestselling products on its e-commerce platform has been its coffee products, for example, Dolce Gusto. Naturally, this comes in addition to the new products the group launches each year to drive growth.
Nestlé usually does not have a fantastic growth story of a quantum leap in earnings to tell. However, those who are holding its shares don’t really bother about it. They know Nestlé will not go off the growth path, even though it is not on the fast track most of the time.