The Behind-the-Scenes Story on Motley Fool Singapore s ...

[Pages:21]The Behind-the-Scenes Story on Motley Fool Singapore's Biggest Winner Yet

How We Made an 88% Return in Just 19 Months!

BROUGHT TO YOU BY THE STOCK ADVISOR GOLD TEAM

All information is provided exclusively by The Motley Fool Singapore Pte Ltd, a licenced investment advisory research provider (MAS Financial Adviser's Licence No. FA100056-1). Any information, commentary, recommendations or statements of opinion provided here are for general information purposes only. It is not intended to be personalised investment advice or a solicitation for the purchase or sale of securities. Before purchasing any discussed securities, please be sure actions are in line with your investment objectives, financial situation and particular needs. International investors may be subject to additional risks arising from currency fluctuations and/ or local taxes or restrictions. The information contained in this publication are obtained from, or based upon publicly available sources that we believe to reliable, but we make no warranty as to their accuracy or usefulness of the information provided, and accepts no liability for losses incurred by readers using research. Recommendations and opinions are subject to change without notice. Please remember that investments can go up and down, including the possibility a stock could lose all of its value. Past performance is not indicative of future results.

Copyright ? 2018 The Motley Fool Singapore Pte. Ltd. All rights reserved. No part of this publication may be reproduced, stored, transmitted in any form of by any means without The Motley Fool's prior written consent. Company Reg. No. 201227853N

All performance information was current as of the date each article was originally published, which we've disclosed throughout.

Disclosure: As of 4 April 2018, Chong Ser Jing owned shares of Dairy Farm International. Chin Hui Leong owned shares of CapitaLand Mall Trust, Dairy Farm International and Singapore Exchange. David Kuo owned shares of CapitaLand Mall Trust.

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Table of Contents

? Introduction ? Section 1: Our "Buy" Recommendation on Nestle Malaysia ? Section 2: Our Coverage of Nestle Malaysia's First Quarterly Earnings

Report as a Stock Advisor Gold Recommendation ? Section 3: Our Coverage of Nestle Malaysia's Second Quarterly

Earnings Report as a Recommendation ? Section 4: Our Coverage of Nestle Malaysia's Third Quarterly Earnings

Report as a Recommendation ? Section 5: Our Coverage of Nestle Malaysia's Fourth Quarterly

Earnings Report as a Recommendation ? Section 6: Our Coverage of Nestle Malaysia's Fifth Quarterly Earnings

Report as a Recommendation ? Section 7: Our Decision to Put Nestle Malaysia on "Hold" ? Section 8: Our Coverage of Nestle Malaysia's Sixth Quarterly Earnings

Report as a Recommendation ? Section 9: Our Decision to "Sell" Nestle Malaysia

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Introduction

Nearly two years ago, back in May 2016, Motley Fool Singapore launched our first-ever premium stock recommendation service ? Stock Advisor Gold.

When we launched Stock Advisor Gold, our hope was to build an exclusive, close-knit club for investors here in Singapore... and one that of course also delivers excellent investing recommendations and advice.

The exclusive access we'd dreamed about at the launch of Stock Advisor Gold has gone exactly as we'd hoped ? if not better. We've taken members on exclusive site visits to Super Group's factory (before the company was taken private ? clinching a 50% profit for us!), the offices of Singapore Exchange (SGX: S68), and the Funan showsuite of CapitaLand Mall Trust (SGX: C38U). We also organised member-exclusive pop-up events to share our views about important events that affected the financial markets, such as Brexit's unexpected occurrence, or when it became increasingly clear that the US would be increasing interest rates.

Then, there's the crown jewel of Stock Advisor Gold: Our annual investing conference, FoolFest.

In 2016, we brought together a stellar group of speakers, including Hugh Young, the Managing Director of Aberdeen Asset Management Asia; Peng T Ong, arguably one of Singapore's most successful venture capitalists; and Gabriel Yap, a renowned local investor.

FoolFest 2017 featured another excellent line-up of speakers, such as Wilson Tan, the Deputy CEO of CapitaLand Mall Asia; Lim Chung Chun, the CEO and Founder of iFAST Corporation (SGX: AIY); and Nicki Ramsay, Founder and CEO of CardUp.

And of course, both FoolFest 2016 and 2017 also featured the entire investing team at Stock Advisor Gold ? plus food!

But we know that for most members, the core of Stock Advisor Gold is applying The Motley Fool's long-term, business-focused investment approach to the Singaporean market.

Which is why our investing team provides members with two formal recommendations each month (one domestic and one international), as well as our full "Watch List" of stocks, discussion forums to share ideas and talk stocks, and our exclusive Gold Insider podcast, where the team talks about what's going on in the financial markets of Singapore and elsewhere around the world.

We custom-built this service based on feedback and ideas from Fool Singapore readers and local investors, and it's truly been an amazing first 23 months for the service. Despite blistering 14.9% returns from the market at large since the service's inception, as of 22 March 2018, Stock Advisor Gold's average recommendation is easily outpacing it with a whopping 24.9% return.

Although it's never wise to measure investment performance by short-term increments (and yes ? even two years is short-term to us!), we're truly pleased with the long-term prospects of all our active recommendations.

Now, to commemorate Stock Advisor Gold's upcoming two-year anniversary and the market-beating success our members have seen so far, we've decided to compile this special behind-the-scenes report to highlight the journey we had in our service's biggest realised winner to-date, the consumer food products group, Nestle Malaysia Berhad (KLSE: 4707.KL).

Stock Advisor Gold recommended members invest in Nestle Malaysia on 25 August 2016. Around 19 months later ? on 13 March 2018 ? we issued a "Sell" recommendation on the company after its stock price had climbed by 87.5% from where we had recommended it.

The Motley Fool is well known around the world for our focus on long-term investing. And while we gravitate towards Warren Buffett's quip that "our favourite holding period is forever," we do recognize that sometimes a company has fulfilled the original purpose we intended for it... or has perhaps deviated from that initial course.

So we hope that you'll find this special "backstage" look at our Nestle Malaysia recommendation from start to finish to be a validation of our Foolish investment principles of business-focused, "buy-to-hold" investing.

What follows is the entirety of the Nestle Malaysiafocused write-ups, articles, and commentary that we published exclusively inside Stock Advisor Gold. From our comprehensive initial "Buy" recommendation, to the "Sell" decision that we recently made to lock in a sweet 87.5% gain in 19 months.

Without further ado, pour yourself a cup of Milo (it's made by Nestle!) and board the time machine with us, to travel back to 25 August 2016...

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Section 1: Our "Buy" Recommendation on Nestle Malaysia

Published in Stock Advisor Gold on 25 August 2016

Headquarters

Malaysia

Website

.my

Industry

Consumer

Volatility

Low (5-Yr Beta: 0.09)

Market Cap

RM18,500.00

Cash/Debt

RM 20.60 / RM 360.10

Revenue (TTM)

RM 4,968.00

Earnings (TTM)

RM 688.40

Total Inside Ownership

72.6%

Recent Price

RM 78.70

Yield

3.1%

TTM = Trailing 12 Months

Dollar amounts in millions except recent price.

Data as of 25/08/2016

Nestle Malaysia (KLSE: 4707.KL) has been listed on Bursa Malaysia since 1989. The company has grown consistently since its listing to become one of the largest consumer companies in Malaysia.

Nestle Malaysia manufactures and distributes a wide range of food & beverage products such as milk, cereals, coffee, ice cream, chocolates, and more. It even has health science mixture products in its portfolio.

The company's products are easily spotted in most retailers in Malaysia such as hypermarkets, supermarkets, and even smaller mom-andpop convenience stores. Nestle Malaysia has also started distributing its products through e-commerce platforms.

On top of these, it also has a sizeable export business which contributed to 20.9% of its revenue in 2015. The rest of Nestle Malaysia's revenue in the year came from domestic sales in Malaysia.

We think Nestle Malaysia has displayed a stellar long-term track record.

In the past 27 years since its listing, it has never recorded a loss. Meanwhile, its revenue has grown from RM 913.8 million in 1989 to RM 4.84 billion in 2015, which is an annual growth rate of 6.6%. The company's earnings have climbed even more impressively by 9.4% per year over the same

period. Moreover, these were achieved without a single incidence of dilution to shareholders ? Nestle Malaysia's number of shares outstanding has remained the same since its listing in 1989.

The Power of Nestle

In our view, Nestle Malaysia has been able to grow its business due to two main factors.

The first is Malaysia's economic growth. In 1989, Malaysia's Gross Domestic Product (GDP) per capita stood at US$2,194. From then to 2014, the economic indicator has grown at about 6.8% per year.

According to the Malaysian government's official guidance, the nation's GDP is expected to show annual growth of 5% to 6% from 2016 till 2020. Malaysia is now one of the top five Asian markets for Nestle Global, the parent company of Nestle Malaysia. We think Nestle Malaysia can continue to take advantage of Malaysia's growing economy.

The second factor is Nestle Malaysia's strong brand, which translates to pricing power. The company's gross profit margin has improved from just 12.7% in 1989 to 38.6% in 2015. Nestle Malaysia has achieved this margin expansion even when one of its competitors, a recent Stock Advisor Gold recommendation Super Group (SGX: S10), has only been able to maintain its gross profit margin over the last 10 years. We think this indicates the pricing power Nestle Malaysia enjoys over its peers.

Another demonstration of Nestle Malaysia's strong brand, in our view, is the bargaining power it has over its customers (while the company's products are consumed by consumers, its customers are actually the retailers). Nestle Malaysia has been steadily improving its cash conversion cycle over the years and achieved a cash conversion cycle of a negative 29 days in 2015.

The cash conversion cycle is basically a measure of a company's effectiveness in converting its products into cash.

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Having a negative cash conversion cycle means that Nestle Malaysia is able to receive cash from its customers before it needs to pay its suppliers. Therefore, the company would not require any working capital in its operations (indeed, Nestle Malaysia ended 2015 with current liabilities that exceed its current assets). Its customers (by paying Nestle Malaysia earlier) and its suppliers (by extending longer credit terms to Nestle Malaysia) are basically financing its operations.

The negative cash conversion cycle also leaves more cash in Nestle Malaysia's hands. This gives Nestle Malaysia the ability to sustain a high dividend payout ratio. Over the past five years, its dividend payout ratio has been consistently above 80%. Moreover, its dividend has also been increasing over the years.

From 2006 to 2015, its dividend per share has increased at a rate of 14.0% (in ringgit terms). And, these dividends have been funded mainly from the company's internal cash resources, given that it has consistently been free cash flow positive for the last decade.

One possible area of growth for the company is exports. In 2015, exports contributed nearly 21% to its overall revenue, as mentioned earlier.

79.1% 20.9%

79.3% 20.7%

2015

Total Sales (%)

Domestic

2014

Sources: Company 2015 Annual Report

Export

Nestle Malaysia is the second largest exporter of Nestle products for the entire Nestle group after the USA. It is also the largest Halal hub for the group. This means to us that Nestle Malaysia is a key centre for any of Nestle Global's plans to expand to other Islamic countries.

Nestle Malaysia's management has mentioned that its export business has been struggling over the past few years. But after a recent restructuring, it seems that this segment is ready to start growing again. In the company's latest results for the firsthalf of 2016, the export business enjoyed doubledigit growth.

Other initiatives the company is focusing on include more product innovation and experiments with e-commerce.

Nestle Malaysia not only adds new products to its suite based on Nestle Global's product range, it has also been coming up with localised products for the Malaysia market. Right now, Nestle Global seems to be pushing for more products in the health science area. If this is successful, it might add a new segment of business for Nestle Malaysia as well. Nestle Malaysia has already started selling some health science products such as the NOVASOURCE Renal product for kidney patients and the feedback has been good.

On the e-commerce front, Nestle Malaysia has recently started partnering with some popular e-commerce platforms in Malaysia and reaching out to younger consumers who might not shop using traditional channels.

All these factors and growth opportunities indicate to us that the best is yet to come for Nestle Malaysia.

Low Risk Does Not Mean No Risk

As a business, we think that Nestle Malaysia has more upside than downside. However, this does not mean we should disregard the risks involved.

The most obvious of them all is the company's concentration in just one market, Malaysia. As already mentioned, nearly 79% of Nestle Malaysia's sales in 2015 come from Malaysia. Since it is a subsidiary of Nestle Global, it would most likely remain a Malaysiacentric company. To Singapore investors, investing into another market, even one such as Malaysia with close historical and cultural associations, will still expose us to risks relating to the foreign country's political and currency situations.

Another risk to consider is the fact that Nestle Malaysia is managed as part of Nestle Global's operations. This means that Nestle Malaysia shares many resources with Nestle Global's other subsidiaries, thus resulting in huge amount of related party transactions.

In 2015 alone, Nestle Malaysia clocked more than RM1.6 billion worth of related party transactions including sale of goods and services, purchases of goods and services, and other costs such as royalties, and finance and IT expenses. Therefore, we think there is a risk that Nestle Global could one day be unfair to

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minority shareholders of Nestle Malaysia in an attempt to protect the entire group's operations.

Given that Nestle Malaysia has enjoyed a long period of growth and expanding margins, there has been little evidence in our view that Nestle Global has been short-changing minority shareholders of Nestle Malaysia. But, investors need to be mindful that past events are not definite reflections of the future.

Nestle Malaysia can be considered to be appealing to income investors with its strong and reliable dividend payouts. Yet, as its payout ratio is high ? more than 100% in some years ? any shortfall in its earnings might directly affect its dividend payments.

It is worth noting that the company did experience a drop in earnings during the Asian Financial Crisis in 1997 and it took the company a few years before it could stabilize its earnings again. Although there was no repeat of a drop in earnings during the 2008 Global Financial Crisis (Nestle Malaysia actually experienced growth in earnings during that period), it does not mean that a decline in profit is impossible in the future.

Lastly, as the economy of Malaysia progresses and its citizens become more sophisticated, the pattern of consumer consumption there might change as well.

For instance, rising affluence might see Malaysia's population desire more imported products rather than domestic staples that include Nestle Malaysia's products. As the market of Malaysia opens up (a typical scenario as an economy grows), there might be more products entering, leading to more competitive market conditions for Nestle Malaysia. Fortunately, such a scenario does not happen overnight, and we would most likely be able to monitor the level of competitiveness in the industry over time.

Is Nestle Malaysia Too Expensive?

With a price to earnings ratio of 26.9, Nestle Malaysia can hardly be classified as a deeply undervalued stock. If we compare the company's P/E with say, the current P/E of 23 carried by pan-Asian retailer and recent Stock Advisor Recommendation Dairy Farm International Holdings (SGX: D01), Nestle Malaysia might even look overvalued at the moment.

Yet, we do feel that Nestle Malaysia deserves a premium compared to other consumer companies.

Nestle Malaysia has shown that it has pricing power over its competitors, such as Super Group, and bargaining power over its customers, such as Dairy Farm International. Nestle Malaysia has also demonstrated that its revenue and earnings are far more resilient compared to the two companies.

PRICE TO LTM EARNINGS

40.00x 35.00x 30.00x 25.00x 20.00x 15.00x 10.00x 5.00x 0.00x

Price To Earnings Ratio

Mar-92 Feb-93 Jan-94 Dec-94 Nov-95 Oct-96 Sep-97 Aug-98 Jul-99 June-00 May-01 Apr-02 Mar-03 Feb-04 Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10 June-11 May-12 Apr-13 Mar-14 Feb-15 Jan-16

DATE

Source: S&P Global Market Intelligence

If we compare Nestle Malaysia's valuation against its own history, the current P/E is slightly higher than the average P/E of 25.6 over the last 10 years. But with its consistent track record of growth, we think this is hardly a concern.

A company with strong growth prospects has the opportunity to grow into its valuation. For instance, based on its net income in 2015, Nestle Malaysia is trading at a P/E of 31 at its current share price. That was much higher than the company's P/E of 26.9 using its earnings over the last 12 months; Nestle Malaysia had experienced a 31.3% year-on-year increase in net profit for the first-half of 2016. This is what we mean by `growing into its valuation.'

In fact, if we look back at periods when the company had high P/E ratios, investors would still have enjoyed strong overall returns even if they had invested during those times.

Time Period

Price To Total Return

Earnings

Till Now

Jan -2004

36.0

501%

Dec-2011

32.5

62%

Source: S&P Global Market Intelligence

CAGR

15.4% 11.3%

For a great company with a strong brand such as Nestle Malaysia, we feel that as long as the company is not excessively overvalued, there is still a good chance for investors to generate respectable long-term returns.

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The Stock Advisor Gold Bottom Line

Nestle Malaysia is one of the largest and most well-managed food & beverage consumer companies in Malaysia.

The growing economy of Malaysia, the pricing power the company has over its competitors, and the strong bargaining position it has with its customers,

could push Nestle Malaysia to greater heights in the future. The company ? as well as its parent ? also has a strong innovative culture of creating new products.

When these traits are combined with its growing export business and stable dividend payouts, we think Nestle Malaysia is one stock you should snack on for your portfolio.

Section 2: Our Coverage of Nestle Malaysia's First Quarterly Earnings Report as a Stock Advisor Gold Recommendation

Published in Stock Advisor Gold on 25 October 2016

Hello fellow Fools,

Nestle Malaysia (KLSE:4707.KL) just reported its third-quarter results earlier today. Its earnings have suffered slightly after a record second-quarter. Here are the highlights.

Highlights for 2016's Third-Quarter

?? Revenue is up by 3.7% year-on-year to RM1.26 billion for the quarter. Both its domestic business and export business experienced top-line growth.

?? More new products were launched.

?? Gross profit increased even more by 6.5% yearon-year to RM491.3 million. The company cited better efficiency in its factories and supply chain as reasons for its gross margin improvement.

?? But profit for the quarter fell by 10.3% to RM160.7 million. This was mainly due to higher promotions during the quarter.

?? Earnings per share declined by 10.3% as well to RM0.685.

?? The dividend for the quarter would be RM0.70 per share, up 7.7%.

Highlights for the First Nine Months of 2016

?? Revenue increased 4.8% to RM3.8 billion. This was due to both higher demand in its domestic and export business.

?? Gross profit also improved by 9.6% to RM1.54 billion due to higher operational efficiency and favourable commodity prices.

?? These, as well as a lower effective tax rate, had boosted net income by 16.1% to RM570.2 million. Earnings per share climbed at the same rate to RM2.43

?? The dividend declared is RM1.40 per share, up 7.7% compared to a year ago.

The Positives

?? Demand for Nestle Malaysia's products continue to show growth. The company has been actively expanding its product range and is also opening up new distribution channels (such as tying up with major e-commerce platforms in Malaysia).

?? The improving gross margin gives us comfort that the company is actively looking for ways to find savings in its operations.

?? The company segments its business into "Food & Beverage" and "Others". "Others" includes business units such as Nutrition, Nestle Professional (a business-2-business, or B2B, unit) and the newly-formed Nespresso (the coffee capsule business).

The strong growth in profit shown by Nestle Malaysia in the first nine months of 2016

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