Nestle to leverage on burgeoning overseas halal food segment

KUALA
LUMPUR: Rising consumption from affluent global Muslim populations will
drive Nestle (Malaysia) Bhd’s double digit sales growth over that of
last year, according to a local brokerage.

Middle Eastern
countries have been accumulating wealth over the past five years due to
surging crude oil prices and this is expected to spur demand for
consumer products and consequently, robust growth for the relatively
untapped halal food segment.

“We believe Nestle
will emerge as a big player in the sector given that it has
increasingly stepped up its exports,” OSK Research said recently in a
report. The brokerage said it expects Nestle Malaysia’s overseas sales
to expand by 6% to 12% from last year, as Nestle was becoming a major
supplier for certain products to its sister companies abroad. The
company’s nine-month export turnover last year was almost equivalent to
its full-year export revenue in 2006, OSK said.

OSK said investors
could expect the consumer product firm’s export sales to make up
between 20% and 24% of total turnover for the next two years, which
would also reduce its sensitivity to local demand as inflationary
pressures beckon.

“Sensitivity of
turnover, which is already low, will therefore be decreased further in
the event of any petrol price hike that could weaken consumer
sentiment,” it said.

It added that
investors need not be too concerned with a consumption slowdown in the
US and Europe as contributions from the regions were still minimal at
between 5% to 10%.

Efficient inventory
would also create an edge for Nestle over its competitors to adjust
selling prices, the research house said. Inventory turnover days for
Nestle is currently 15 to 18 days, 20% to 25% less than other key
industry players.

According to OSK,
Nestle was expected to start exporting this year to new markets such as
France, Germany, UK, Australia, USA and Papua New Guinea.

Nestle Malaysia’s
biggest export segment is currently Asean countries such as Indonesia,
Thailand, Singapore and the Philippines. Indonesia, which has a large
Muslim population, imports Milo and cereal products. The company’s
parent designated the Malaysian operations a halal hub in mid-2006, to
enable better economies of scale and optimise resources, giving room
for best-selling products and abundant growth opportunities in overseas
markets, OSK said.

It said that as of
3Q07, the beverages and confectionery segment accounted for 50.7% and
2.9% respectively of total revenue and that sales of these products
were expanding faster than other segments. Nestle Malaysia is currently
the brand’s strategic supplier of confectionery products such as Kit
Kat and Smarties, as well as Milo and cereals.

The company’s export
sales however are not likely to be as lucrative as local sales, as
indicated by its management, according to OSK. However, the brokerage
said it believed export margins were a strong and sustainable source of
revenue and earnings growth in the long term. It added that
profitability would improve, due to more efficient usage of production
machinery and facilities.