NESTLE announced the proposed disposal of its chilled dairy business (CDB) and factory to the Lactalis Group for a total consideration of RM155.3m. The proceeds would be utilised to consolidate the group’s Milo production facilities in Chembong as well as to pare down debts. We trim our FY19E earnings by 2.7% on the loss of revenue from CDB operations. Maintain UNDERPERFORM with a lower TP of RM129.00 (from RM132.55).

Proposed disposal of CDB operations and factory. Yesterday, NESTLE announced the proposed disposal of the group’s CDB operations and factory in Petaling Jaya to the Lactalis Group, the largest dairy product manufacturer globally. The total consideration of RM155.3m includes the sale of its factory, fixed assets, unfinished goods and inventories. At present, CDB operations contribute less than 3% of group revenue. The proposed disposal is earmarked to be fully completed by 3Q19.

Funds towards expanding Milo production and working capital. Currently, the existing CDB factory houses certain manufacturing assets for Milo products. Utilising up to RM100.0m of the proceeds from disposal, the group aims to consolidate its entire Milo production capabilities into its Chembong plant in Negeri Sembilan. The consolidation is likely aimed to optimise the production capacity for Milo products and enabling more integrated efficiencies. The remaining funds of RM55.3m are expected to be utilised to pare down debts. From the overall exercise, the group indicated a one-off net gain from disposal of c.RM27.0m.

Investing in long-term gain. Overall, we are neutral with the proposed disposal’s medium-term impact to the group. With the disposal of its CDB operations, the group’s FY19 top-line is expected to be undermined by lower product contributions. We suspect that the product portfolio from this segment includes the Nestlé Bliss yogurt series and Nestlé Omega Plus milk powders. However, investments into the Milo brand could benefit the group meaningfully in the long run, being one of its flagship offerings.

Post announcement, we trim our FY19E earnings by 2.7% to account for the loss of revenue from the disposal while also narrowing the group’s debt. Our dividends are also trimmed to 345.0 sen from 350.0 sen with this adjustment. We do not anticipate any one-off dividend payments from this disposal as its entire proceeds would be utilised.

Maintain UNDERPERFORM with a lower TP of RM129.00 (from RM132.55, previously). Our valuation is based on an unchanged 37.0x FY19E PER (at +1.0SD over the 3-year mean PER, applied across large cap F&B stocks) on our lower core EPS of 348.7 sen. We believe most positives have already been priced in following its stretched valuations post-inclusion into the key benchmark index. In addition, its dividend yields are less attractive at present price levels, generating 2.0%/2.4% for FY18/FY19.

Risks to our call include: (i) better-than-expected sales, (ii) more favourable commodity prices, and (iii) lower-than-expected operating costs.

Source: Kenanga Research - 10 Oct 2018