RAM has reaffirmed the respective long- and short-term ratings of AAA and P1 for Nestle Foods (Malaysia) Sdn Bhd's ("Nestle Foods") RM700 million Al-Murabahah Commercial Papers/Medium-Term Notes Programme (2003/2010) ("CP/MTN"), with a stable outlook.
The CP/MTN is backed by a corporate guarantee from Nestle (Malaysia) Berthed ("Nestle Malaysia" or "the Group"), the parent company of Nestle Foods. Effective 1 January 2005, Nestle Foods ceased its manufacturing operations following the consolidation of Nestle Malaysia's wholly owned manufacturing subsidiaries.
Nestle Foods, Nestle Manufacturing (Malaysia) Sdn Bhd ("Nestle Manufacturing") and Nestle Asean (Malaysia) Sdn Bhd ("Nestle Asian") into Nestle Manufacturing. In the meantime, the confectionery operations at its Teeming factory in Negro Semolina have been consolidated into Nestle Asian. As such, Nestle Foods has become a dormant company; Nestle Asian will only have confectionery operations; and Nestle Manufacturing will carry out all of the Group's other manufacturing activities.
The cessation of Nestle Foods' manufacturing operations, however, does not have an impact on the Company's ratings or credit profile as the CP/MTN is backed by a corporate guarantee from Nestle Malaysia.
As such, the A/P1 ratings still reflect the credit profile of Nestle Malaysia as a group. The ratings continue to reflect the Group's strong financial profile as well as its dominant position in the packaged food and beverage market.
In 2004, Nestle Malaysia's driving brands, such as Milo and Nescafe, retained their superior market positions with over 90% and 80% shares of their respective segments, ie health food drink and instant coffee. In the meantime, the Group's Maggi brand of instant noodles has remained a clear leader, commanding over half of its market segment.
Elsewhere, Nestle Malaysia's range of ice creams is currently leading this segment, as is the same for its infant milks and powdered milks. The Group's range of sweetened condensed milk, on the other hand, is still second behind that of Eraser & Nerve Holdings Berthed.
In the meantime, rising input costs, coupled with unfavourable exchange rates over the last few years, have exerted pressure on the Group's profitability. Nonetheless, Nestle Malaysia has successfully alleviated the impact on its gross margin by passing on the increased costs to consumers via launching new products and innovating existing lines, as well as enhancing its operational efficiency.
As a consequence, its gross margin stabilised at 31% in FYE 31 December 2004 ("FY December 2004") and 1H FY December 2005. In line with Nestle Malaysia's encouraging operating performance, its balance sheet has also improved notably.
As at end-1H FY December 2005, the Group's net gearing ratio ameliorated to 0.77 times from 1.20 times as at end-FY December 2003, following robust profit accumulation and reductions in its debt level. Meanwhile, Nestle Malaysia continued to record a strong operating cashflow debt cover of 0.58 times and a free cashflow debt cover of 0.48 times as at end-1H FY December 2005, highlighting the Group's superior cash-generating ability and debt-servicing aptitude.
Nestle Malaysia has a favourable near-term liquidity position. As at end-1H FY December 2005, its RM168.46 million of debts due within a year were mainly trade-related, compared to its RM51.77 million of cash holdings.
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