7 February 2013 GLOBAL IDEAS www.anchorcapital.co.za www.investorcampus.com Nestlé SA — A sweet investment opportunity Background Nestlé SA (NESN) is a Swiss-based, multinational consum- Nestlé SA share price performance (CHF) er goods company that manufactures and markets a wide range of food products. The company's product line in- 70.00 cludes milk, chocolate, confectionery, bottled water, coffee, creamer, food seasoning and pet foods. It was founded in 60.00 1866 and currently has 330,000 employees in over 150 countries, with 461 factories in 83 countries. The company has over 4,000 brands and more than 1bn Nestlé products 50.00 are sold every day. It is also the world’s biggest food com- pany by revenue. Nestlé is in 33rd place on Forbes’ most 40.00 powerful brands list. 30.00 Nestlé’s metrics are as follows: 20.00 Spot (CHF) 64.15 10.00 Mkt Cap CHFmn 206 871 31-Jul-97 31-Jul-98 31-Jul-99 31-Jul-00 31-Jul-01 31-Jul-02 31-Jul-03 31-Jul-04 31-Jul-05 31-Jul-06 31-Jul-07 31-Jul-08 31-Jul-09 31-Jul-10 31-Jul-11 31-Jul-12 31-Jan-07 31-Jan-98 31-Jan-99 31-Jan-00 31-Jan-01 31-Jan-02 31-Jan-03 31-Jan-04 31-Jan-05 31-Jan-06 31-Jan-08 31-Jan-09 31-Jan-10 31-Jan-11 31-Jan-12 31-Jan-13 12M trailing P/E 19.76 31-Jan-97 12M fwd P/E 17.30 Source: Bloomberg, Anchor Capital 10-year average P/E 19.70 10-year average DY 2.59 FYE 31-Dec P/Book Ratio 3.70 12M trailing DY 3.33 12M fwd DY 3.50 Source: Bloomberg, Anchor Capital Global Ideas is a newsletter published four times a week The group’s products segment format is divided into the (Monday, Wednesday-Friday) and available only to clients of following seven product groups (segments): Investor Campus and Anchor Capital. Twice-weekly (in the Monday and Thursday editions) we feature an in-depth analy- Powdered and Liquid Beverages (includes Nescafe, sis of a company on our focus list. The key objective of this Milo, Nesquik, Nestea, Nespresso etc). newsletter is to provide ideas for investment in the global in- Water (Nestle). vestment universe. Milk products and Ice Cream (Nestlé, Coffee mate, Dreyer’s). We scan the globe looking for good opportunities. We provide Nutrition and HealthCare (Nestlé, Nan, Gerber, Galder- our model portfolios, as well as news and views on our watch- list, which is continually reviewed and updated. ma). Prepared dishes and cooking aids (Maggi). Confectionery (Nestlé, KitKat); and PetCare (Purina, Friskies). Contacts Anchor Capital reception 011 783 4793 Trading Desk 012 665 3461 Investment/ Sales [email protected] General Enquiries [email protected] Brokerage/ Trading [email protected] Newsletter Enquiries [email protected] Anchor Capital (Pty) Ltd, FSP number 39834. www.anchorcapital.co.za; www.investorcampus.com 1 www.anchorcapital.co.za www.investorcampus.com Nestlé’s share price gained 10.4% in 2012, while the However, growth in its Asia Oceania and Africa (AOA) group’s share price has outperformed its peers (Unilever region, which accounts for c. 25% of its sales, fell to 9.4% and Danone) over the past 46 months. The share price from 11.6%. The company noted that its AOA sales were reached a 52-week high of CHF64.50 on 30 January impacted by some one-offs including typhoons in the Phil- 2013. ippines which closed production for a week, while demon- strations in Pakistan, elections in Egypt and sanctions in Nestlé SA share price vs peers, rebased to 100: Iran also impacted 3Q12 sales. 450 Nestlé turnover by region (January-September 2012), 400 CHF 350 300 250 200 150 100 50 31-Jul-97 31-Jul-98 31-Jul-99 31-Jul-00 31-Jul-01 31-Jul-02 31-Jul-03 31-Jul-04 31-Jul-05 31-Jul-06 31-Jul-07 31-Jul-08 31-Jul-09 31-Jul-10 31-Jul-11 31-Jul-12 31-Jan-13 31-Jan-97 31-Jan-98 31-Jan-99 31-Jan-00 31-Jan-01 31-Jan-02 31-Jan-03 31-Jan-04 31-Jan-05 31-Jan-06 31-Jan-07 31-Jan-08 31-Jan-09 31-Jan-10 31-Jan-11 31-Jan-12 Nestlé Danone Unilever Source: Bloomberg, Anchor Capital 9M12 results In October 2012, Nestlé released 9M12 results, which saw sales increase 11% YoY to CHF67.6bn. The results Source: Company reports disappointed the market as Nestlé missed analyst expec- The debt crisis in Europe saw Nestlé’s growth in the re- tations for the first time in several quarters. The company gion slow to 1.9% from 2.4%, while in the US sales reported continued growth in developed, as well as growth was steady at 5.5%. Nestlé said that in many de- emerging markets (EMs). EMs delivered double-digit veloped markets where consumer confidence is low, the growth with Africa growing at twice the zone average and trading environment remains subdued while in most EMs, the Middle East also performing well, while China and conditions remain dynamic, with significant growth oppor- Indonesia were among the other markets contributing tunities. well. The categories that were the key growth drivers were dairy, powdered beverages and ready-to-drink, par- ticularly Nescafé, ambient culinary with Maggi and Totole, Nestlé’s global presence chocolate including Shark in China, and ice cream. Divisional contribution to sales Powdered and Liquid PetCare Beverages 12% 22% Confectionery 10% Water 8% Source: Company reports Prepared dishes and cooking aids 16% Milk products and Ice At its results the company noted that 3Q12 was “not a cream Nutrition and 20% good guide to 4Q” but reiterated its "Nestlé Model" out- HealthCare 12% look of 5-6% organic growth, together with an improve- ment in margins and EPS in constant currencies. Source: Company data, Anchor Capital 2 www.anchorcapital.co.za www.investorcampus.com Growth drivers: Ability to pass on price increases: Nestlé manufac- We see the following as growth drivers for the company: tures a wide variety of consumer staples targeting the EMs: Nestlé’s presence in and strong demand from the mass market where consumption has remained rela- high-growth EMs (which account for c. 40% of sales) tively stable. At the same time the company’s domi- has helped it (and Unilever) outperform its peers in- nant market position in terms of key products allows it cluding Danone and Procter & Gamble in EMs. some leeway in increasing prices and passing on Pfizer acquisition: Nestlé is in the process of acquir- costs to consumers. This has resulted in the group’s ing Pfizer’s infant formula business for $11.85bn operating margins remaining relatively stable during (EUR9bn), subject to regulatory approval. The deal has the global financial crisis and the commodity price been filed in 15 countries and cleared by authorities in boom. 10, while Mexico has rejected it. Combining both com- panies’ infant formula businesses will result in Nestlé Conclusion: dominating the market in up to 10 countries (Saudi Ara- Nestlé has a significant global footprint with a much wider bia, South Africa, Chile, Philippines, Hong Kong, Vene- global reach than most of its competitors. However, be- zuela, Colombia, Egypt and possibly Britain). Thus, sides its significant presence in high-growth EMs, Nestlé Nestlé will likely be forced to re-sell between 20%-40% also has excellent (and well-known) brands. Thirty of its of Pfizer’s business. Pfizer’s infant formula division individual brands generate more than $1bn in sales each made profit margins of 25% for FY11, an EBITDA of year. In terms of brand weakness probably the worst criti- $500mn on sales of $2.2bn with Nestlé predicting an cism that can be leveled against Nestlé is that it has not EBITDA of $600mn for FY12 and saving $160mn over come up with new product innovations and it has only the next two-to four-years if the deal is completed. Pre- made marginal changes to its older products. Neverthe- viously, Mead Johnson was the biggest instant formula less, the company also has an enormous collection of producer with a 20% global market share, followed by slow-to-moderate-growing businesses that churn out cash Nestlé and Danone (between 18-20% each). However, through growth and price increases, which management if the deal goes ahead Nestlé will become the global then returns to shareholders in the form of dividends and leader in terms of market share, global brands and share buybacks. The group’s growing dividend is an ex- market penetration. Nestlé has said it expects the mar- cellent way to benefit from the business, with Nestlé pay- ket to grow by 19% between 2010 and 2016. Pfizer’s ing an always growing 3.3% cash dividend yield (Unilever nutritional business operates in 60 countries with 85% and Danone pay a lower cash yield). We believe Nestlé is of its sales in EMs and according to Nestle this was a stable cash flow generator which is growing hand-in- one of the key attractions, as it offers increased scale hand with the emerging middle class in countries such as in this high-growth, high-margin sector which is growing Brazil, China and India, while at the same time carefully especially quickly in EMs. managing its cost structure. The company’s diverse busi- China: With a rising middle class in China expanding ness line makes it less vulnerable to government regula- their tastes and becoming more interested in on-the-go tions.