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Recently, I met with an investor who was just starting out with investing. The first question he asked me was: “How do you find investment opportunities?”
My answer to him was simple: Start looking for ideas within your circle of competence and you will be shocked at how many ideas you can find.
For instance, I used to work in the plastics industry and LMA International (SGX: L24) and Armstrong Industrial (SGX: A14) were two of my clients at that time. Hence, when I started investing, LMA and Armstrong were among the first few companies I analysed and invested in because I was already familiar with them and their business models. LMA and Armstrong would both be later privatised and I made some good returns in the process – 47% in two years for Armstrong and 43% in four months for LMA.
Investment ideas are all around you and one of the best ways to spot them is when you’re grocery shopping at the supermarket. It was on one such excursion that I noticed that many products brand in the supermarket like Nescafé, Nespresso, Kit Kat, Perrier, Mövenpick, etc. are all owned by one company – Nestlé S.A.
Nestlé S.A. is a multinational food and beverage company listed on the SIX Swiss Exchange in Switzerland. Nestlé is the largest food company in the world and its business model is one that most people should be familiar with since so many of us consume their products every day. Now it’s a bit cumbersome for someone like me based in Singapore to invest in the Swiss Exchange, but if you dig a bit further, you will realise that Nestlé S.A. has a subsidiary listed on Bursa Malaysia under the name Nestlé Malaysia Berhad.
That piqued my interest and I decided to dive in further. What I found was a company that impressed with me its business track record and financials. Rightly so, its five-year stock performance is similarly impressive.
So let’s run through Nestlé Malaysia Berhad using the Investment Quadrant to show you what I found.
Nestle Malaysia Berhad is 72.6% owned by their parent company Nestlé S.A. It has been in Malaysia for 102 years when they first started operations in Penang in 1912. Nestlé Malaysia manufactures food products in the categories of junior food, milk, chilled dairy, cereals, creamers, beverages, coffee, ice cream, and confectionery. Brands, which are familiar household names, include Nescafé, Nestum, Cerelac, Milo, Kit Kat, Maggi, etc.
The food products produced by Nestlé Malaysia are also halal, boosting the company’s sales in Islamic countries. Nestlé Malaysia generates 76.5% of its revenue from the domestic market with the rest coming from the export market.
For a more detailed analysis of Nestle Malaysia’s business model, do look out for our case study video lesson for Investment Quadrant members.
Since 2000, Nestle Malaysia has emphasized improving operational efficiency and embarked on internal cost-saving initiatives to counteract rising raw material costs. Their top priority is to minimize price increases and avoid passing costs onto customers as far as possible.
What really impressed me is although the company’s leadership has changed hands three times over a course of 13 years, Nestlé Malaysia has steadfastly remained focused on their priority of operational efficiency and cost saving. True enough, the company’s efforts have paid off and Nestlé Malaysia has seen a steady increase in revenues, profits and margins over that last 10-13 years.
The management has also consistently paid out more than 90% of profit to shareholders as dividends and its dividend per share has continuously increased every year for the past 13 years.
Now that we have a brief background of Nestle Malaysia’s business model and management behaviour, let’s have a look at its financial track record since 2000.
Revenues have consistently increased for the past 13 years regardless of economic recessions. Total revenue grew from RM2,202.5 million in 2000 to RM4,787.9 million in 2013.
Net profits have seen a similar uptrend – growing from RM202.5 million in 2000 to RM561.7 million in 2013.
Despite rising raw material costs, Nestlé Malaysia has been able to maintain their gross profit margins due to the introduction of new high margin products. Net profit margin has steadily increased due to the cost-saving initiatives implemented by the management.
Despite the volatility in Nestlé Malaysia’s operating cash flow, we still see an overall uptrend from RM409.6 million in 2000 to RM663.6 million in 2013.
Nestle Malaysia’s earnings are extremely high quality; cash-flow-to-net-income ratio has comfortably been above 1 every year except 2001. This means for every dollar of profit Nestlé Malaysia generates, it receives a dollar (or more) in cash flow.
Nestle Malaysia’s ROE (Return on Equity) is hugely impressive. Companies with an ROE of 15% or more are considered pretty good, Nestlé Malaysia’s ROE was 41.3% in 2000 and they grew it further to 68.8% in 2013. However, ROEs can be artificially boosted by debt, so let’s have a look at Nestlé Malaysia’s debt levels.
Nestlé Malaysia’s debt/equity ratio has fallen over the last 13 years while ROE has increased in the same time period. This is a great sign that shows the company has been doing a great job at deploying its capital.
Now we have reached a favorite number of many investors – dividend per share. Due to Nestlé Malaysia’s rising revenues and profits, low debt and high ROEs, the company has paid an increasing dividend per share for the last 13 years. Shareholders have seen dividends increase from RM0.821 per share to RM2.35 in 2013. This means dividends have grown, on average, 8.4% a year the last 13 years.
I’ll be covering how to value Nestlé Malaysia stock and its intrinsic value in a case study video lesson for Investment Quadrant members. So if you’re a member, do watch out for his video in the member’s area really soon.
As you can see, Nestlé Malaysia is a pretty impressive company with great financial track record over the last decade and a solid management team. It doesn’t take a genius to know that Nestle Malaysia stock is an arguably great investment – IF you buy at the right price. (That’s why valuation is extremely important and is one of our four investment quadrants.)
So the next time you’re out grocery shopping or just out and about, keep a look out at the products/services you personally use. Ask yourself if the companies behind these products and services are listed on any stock exchange and start digging! If you do that, I can assure you that you will unearth companies like Nestlé Malaysia right under your nose.
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