NEST’s net profit up by 3.7%YoY to LKR482.4 mn in 1Q2010

Nestle Lanka (NEST : LKR526.0) was established in 1980 and manufactures a range of food under the license of its Swiss principle. NEST is 90.8% owned by parent Nestle SA. The company's main products are marketed under established brand names such as Nestomalt, Nespray, Maggi, Milkmaid, Milo, Nescafe etc.

NEST has recorded a 3.7% YoY growth in net earnings during 1Q2010 to LKR482.4 mn. With the integration of north and east into the main stream economy and the anticipated increase in economic activity, the consumer sector is expected to witness a strong spur of growth. Even though, NEST has had presence in the north and east even during the civil conflict, we believe NEST would continue to take advantage of the additional economic activity and the expected growth in disposable income as the citizens in the north and east regain their purchasing power.

We forecast NEST to post LKR1,794.2 mn in 2010E. Based on the potential outlay for the fast moving consumer goods and with the company's capacity expansion plans at their Pannala factory coupled with the amalgamation of north and east into the main consumer base, we conservatively forecast NEST to record a 14.0% YoY growth in earnings to reach LKR1,794.2 mn in 2010E and a further 10.0% YoY to LKR1,967.4 mn in 2011E.

Active dividend play. Though the share trades on 15.8X projected 2010E net profit and 14.4X forecasted 2011E earnings, we believe the share has market upside due to the anticipated increase in consumption and economic activity that would trigger NEST's bottom line. NEST's historical dividend pay out ratio has averaged to around 100% in the past whilst its dividend yield is at around 17.5%. So on the back of high dividend yield and the undiscounted growth potential, we rate NEST a BUY.

Courtesy - Asia Research