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Wednesday, 31 July 2013

Nestle Malaysia are about Milo and Halal

Nestlé started out in Penang in 1912 as the Anglo-Swiss Condensed Milk Company was acting as a trading company for the Milkmaid brand condensed milk, or as it was more popularly known, “susu chap junjung”.

It set up its first factory 50 years later in Petaling Jaya, near to the capital of Kuala Lumpur, started with local production producing sweetened condensed milk, and later its popular chocolate malt drinking powder MILO and its MAGGI instant noodle products, and later tomato and chilli sauces.
The company now employs more than 5,700 employees in Malaysia. It operates seven factories,with its main production centres in Klang Valley, Negeri Sembilan and Sarawak, all of which are halal certified. Malaysian arm of Nestlé has become a regional product supplier for Southeast Asia within the Nestlé group.“Malaysia is very well positioned within the region, it is easy to ship products in and out, and there is little bureaucracy,” Vogt explains the benefits of the group’s Malaysian presence.

The range of Nestlé products comprises more than 300 products, with MILO, NESCAFÉ and MAGGI being the best selling brands in Malaysia all of which are halal certified. and a lot of  other  foodstuff and beverages – from instant noodles to baby cereal. other brands such as Kit Kat and Nespray. “Other brands and categories also account for up to about five per cent of sales, for example ice cream and milk.”

The Damansara-based food giant manufactures its products in seven factories here and two factories in Singapore.

South East Asean

There are quite large differences in the sales volume of Nestlé brands among the countries in the Southeast Asia region, which has to do with different import regulations.

“You can see great differences in the range of products between, let’s say, Malaysia, Thailand, Indonesia or the Philippines. When Nestlé came here, Malaysia was very open, and we could invest and set up trade points and production facilities easily, while other countries like Indonesia or Thailand were more difficult because they had protection for certain local industry sectors where foreign companies were not allowed,”  said Managing Director in 2012, Peter Vogt

“However, nowadays it is starting to become more aligned. We can increasingly export into almost any country, we benefit from minimal tariffs within ASEAN, and there are almost no restrictions anymore,” he adds.

Nestlé (M) Bhd current managing director Alois Hofbauer who has recently took over the helm in February says Nestlé, which celebrated its 100th anniversary in Malaysia last year, is a “powerful company and has gained consumers trust” over the years.

Hofbauer, an Austrian relocated to Malaysia from Sri Lanka, says Nestlé Malaysia has deep roots in this country. “We are like the local multinational company. Many see us as a local MNC.”

Hofbauer says earnings driver would come from three directions – continued growth from its existing products, innovative products and export markets.

He adds that Nestlé will continue to grow and come out with more innovative products for its Milo, Nescafe and Maggi noodles. “We recently introduced Maggi Magic Meals recipe mix. It is a chicken dish in the most convenient way,” Hofbauer says.

Nestle, Hofbauer says, looks at innovation in two ways. One is for consumers through innovation and renovation of the end-products. The other innovative products include Milo Sejuk, a cold water-soluble Milo mix and the Dolce Gusto brewing machine that makes coffee from capsules.

Hofbauer says exports seem to have picked up. Nestle saw demand rise in its export markets in the first quarter ended March 31 compared with the marginal decline experienced in the fourth quarter 2012. He says Malaysia’s halal certification which is recognised around the world gave it an advantage as well enabling it to export to a lot of markets.

Hub of expertise

Nestlé was also the first foreign company venturing into the halal food industry in Malaysia as early as in the 1980s. The company set up a halal committee and introduced its Halal Policy, and even eliminated all non-halal food from its internal canteens, with the result that its production is now 100 per cent halal certified. Today, Nestlé Malaysia is the Centre of Excellence for halal within the entire Nestlé group.

Malaysia was Nestlé’s first market to apply for halal certification for all its food products. This followed the Malaysian government’s introduction of voluntary halal certification in 1994.
Nestlé Malaysia is now the company’s global Halal Centre of Excellence.

This means it offers policy guidelines, know-how and expertise on halal to other Nestlé markets.
Nestlé Malaysia’s Halal Policy outlines information on ingredients, sourcing, production, packaging and transportation of Nestlé halal products.

Nestle has chosen Malaysia as its global halal food production centre to meet the growing demand for such products in 2006.Nestlé Malaysia, producer of the company’s biggest range of halal products

Nestlé consumers worldwide have been able to buy halal versions of the company’s well-known brands such as Milo, Nescafé, Maggi, Kit Kat and Nespray since the 1980s.“And with our halal expertise here, we have a unique opportunity to serve the Middle East as well”

Today Nestlé Malaysia produces about 300 halal products in its food and beverage range which are exported to more than 50 countries worldwide.

Halal certified products are sourced, manufactured, imported and distributed in accordance with Islamic law to meet the needs of Muslim consumers.

Halal worldwide

Other leading Nestlé markets which produce halal products include Indonesia and the Middle East.
In Europe, Nestlé’s halal products are manufactured mainly in France, Germany, the Netherlands and the United Kingdom.

Nestlé halal products are also produced in the United States.

A halal inspection authority, such as the Halal Food Council of Europe, inspects the company’s factories with a Nestlé Halal Committee member to ensure products comply with Islamic law before halal certification is awarded.

Nestle’s confectionery such as Kit Kat chocolate snacks is also one of the fastest-growing product segments. “We have re-launched our Kit Kat confectionery products with a new range and have made it more affordable. In the past five to six years, it had a relatively flattish growth. After the re-launched, with fresh products, it is now growing fast,” Hofbauer says.

Nestlé is expected to add more manufacturing capacities in its plant in Chembong in Negri Sembilan. It is also working on details on setting up a manufacturing plant adjacent to its Shah Alam plant.
For the current financial year ending Dec 31, 2013, Nestle has earmarked more than RM200mil as capital expenditure (capex) to boost its operations.

“Bulk of the capex will be invested in liquid drinks and an expansion of the confectionery segment,” Hofbauer says, adding that last year the company spent about RM160mil in capex for the expansion of its culinary products and confectionery division.

Hofbauer says the group’s new plant would begin commercialisation in the first half of 2014. He adds that the new plant in Shah Alam would be mainly for liquid drink products, which,  Nescafe has a market share of 70% and Milo 50% in the ready-to-drink category.

Milo is certainly Nestle’s success story, commanding a lion’s share of the health drink market for decades. Despite its success, Hofbauer says Nestlé still has Milo under its watchful eyes.

 “Today Milo is much bigger than it was years ago. We have some 90% market share of the fast-growing health food drinks market,” he says.

Milo is very popular in Malaysia and Singapore, where the brand name is synonymous with chocolate flavoured drinks: Milo has a 90% market share in Malaysia (not the often quoted 90% worldwide share of Milo consumption), and Malaysians were said to be the world's largest consumers of Milo. This is because Milo was once used as a nutrient supplement when it was first introduced in the country, and has thus gained a reputation as a 'must have' drink for the old and the younger generations. Milo manufactured in Malaysia is made to dissolve well in hot water to produce a smooth hot chocolate drink, or with ice added for a cold drink. "Milo Vans" were often associated with sports days in these two countries, during which primary school pupils would queue up to collect their cups of Milo drinks using coupons

In 2012, the food beverages segment accounted for RM3.74bil, or 82% of Nestle’s total turnover of RM4.55bil. For the full financial year 2012, Nestle reported a net profit of RM505.3mil, or 215.50 sen earnings per share on revenue of RM4.55bil.

"In the coffee segment, Nescafe holds a 70 percent market share in Malaysia. Nestle's largest beverage brand is Milo.Our market share in coffee has been very stable over the years" said its business executive manager for coffee and beverages (Malaysia/Singapore), Don Howat.

Hofbauer says Milo and Nescafe are its star performers. He adds that Nestlé liquid drinks segment have also gained traction with strong growth in 2012 and gained market share.

Raw material

In terms of raw materials, Nestlé Malaysia uses a range of locally-grown products, but they are, however, not always sufficiently available for all the products, especially coffee and cocoa.

“We used to source cocoa from Malaysia, but since many farmers have switched to palm oil, it is not available any more at the volume we need, and we now get it from Indonesia or from other parts of the world,” Vogt says.

“We would like to use more local raw materials, but it is not always possible.”
Two examples for local products processed at Nestlé Malaysia are chilli, which is used for MAGGI chilli sauces, and rice for cereal products.

“We are working together with farmers on these specific raw materials,” Vogt says.

Nestlé (M) Bhd is set to increase the prices of its dairy products from between 4% and 8% by the middle of the year, citing rising global dairy prices as the cause of the increase.

Admittedly, Hofbauer says the group was rather boring but it has paying generous dividends to shareholders. Over the past five years, Nestlé has paid more than 90% of its net profit to shareholders.

“More importantly, not only did shareholders get dividends, they also got a nice appreciation in Nestle’s share price,” he declares.

Hofbauer says Nestle’s ability to generate cash flow enables it to reward shareholders. “Profit is an opinion. Cash flow generation is a fact.”

On a lighter note, Hofbauer, who has been with the Nestle group of companies since 1990, still finds joy with his work. “I don’t work regular hours. I will be reading emails in the morning. You have to like what you do, or it’ll be a painful scene,” he says.

Insider Asia have a analyst report of Nestle recently. Affin Investment Research said:
"All is healthy but valuations remain lofty," it said. "All in, we like Nestlé for its proven track record in strong brand and cost management; resilient demand for its products; and generous dividend payouts (above 95%).

"Nonetheless, the stock's current valuation at 27 times (above +2 standard deviation) FY14 PER fully prices this in, while yields have compressed to an unattractive 3.3%.

"We maintain our 'reduce' rating on Nestle but with a higher discounted cash flow-derived target price of RM67.05. (Previous TP: RM62.20)," Affin Research concluded.

Fairly-valued - Hold

 Kenaga, however, have a target price of RM72.80.which is based on Fwd PER of 29.0x over FY14E EPS. On account of a 10.5% share price appreciation thanks to the post-GE rally, our TP only offers a 5.5% upside now and hence we reiterate our MARKET PERFORM call.  stated Kenaga.


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