Nestle is a leading company that provides food, nutrition, health and wellness. At the same time, Nestle is a well-known food provider company which creates products such as MILO, NESCAFE to suits people's daily lifestyle. Nestle Group started in 1867 by Henri Nestle whereby he started off with experimenting nutritional food supplements to overcome infant mortality (Nestle Malaysia, 2010).
The company's original business was more on dietetic foods for children and milk, through mergers and acquisitions Nestle have a diversified range of products. Throughout the years, Nestle have been growing which leads them to become the largest food provider that provides 8500 brands and 10,000 products in over 80 countries (Nestle Malaysia, 2010).
Background of Hong Leong Bank Berhad
Hong Leong Bank Berhad is a public listed company which deals with financial services. Hong Leong Bank started in 1905 in Kuching, Malaysia named under Kwong Lee Mortgage and Remittance Company and in 1934 it was merged with Kwong Lee Bank Ltd. The name was then renamed to MUI Bank in 1989. Hereafter in 1994, MUI Bank was acquired by Hong Leong Financial Group Berhad whereby this year was the birth of Hong Leong Bank.
In 2004, Hong Leong Bank acquired finance company which is Hong Leong Finance Berhad. However, with experience and knowledge in banking field leads Hong Leong Bank to gain strong market position and a well- renowned business franchise and brand.
Subsequently, in 2011 Hong Leong Bank transforms themselves from bank into a banking group by merging with EON Bank Group. Due to the merger, the group has expanded their network by having 329 branches nationwide while also own more than RM 145 billion in assets.
Corporate Goals of Nestle Malaysia Berhad
Corporate goals that have been achieved by Nestle in regards to financial management includes Nestle in Malaysia have been performing well as the group manage to achieved a turnover of RM 4.7 billion, which is 16.8% higher as compared to last year. The high revenue was due to the group having consistent double digit growth in the domestic market and achieving strong sales in export businesses. Export attaining double digit growth which is 25% of total sales as shipments to ASEAN constituting more than half the total as earlier investments in soluble coffees and coffee creamers benefited the growth opportunities.
Nestle also manage to achieved their corporate goals as the profit margin before tax manage to increase 30bps to reach RM 558.8 million due to better absorption of fixed costs and higher sales. At the same time, Nestle manage to attain net profit of RM 456.3 million in the financial year.
In the aspect of dividend, Nestle board proposed RM 1.25 per share as final net dividend subject approval by the board. However, the board declared a total net dividend of RM 1.80 per share for the financial year.
Investments that increase the wealth of the shareholders were made by investing in a new filling line and processing for chilled dairy, a new production line for wafer in Chembong, setting up a new noodles production line in East Malaysia, installing a new coffee roaster, increasing the capacity for filling 3 in 1 packaging lines and lastly investment to increase the capacity of KIT KAT lines were made.
Future financial goals were clearly stated as Nestle have come out with plans in line with the Malaysian economy projected growth of 4%-5%. Besides, the company will take necessary measures to soften and mitigate the impacts on the company.
Part 3
Stock Valuation Methods
There are two types of stocks valuations. The first type is determined by using various types of sales, cash flow or fundamental earning analysis. The second type is describes how much the investor will want to pay for the stocks or how much other investors are prepared to sell their stocks based on demand and supply. However, investors often change the methods of analyzing the stocks and when they become more or less assured towards the future of stocks which could affect the values being change over time.
The first method of stocks valuation is called fundamental valuation. This refers to the valuation method which investors use to justify the stock price. For example: valuation approach is P/E ratio, where P/E= Price to earnings ratio. The aim of this valuation is to give value towards the stock based on measurable element using statistics and historic ratios. This type of valuation usually determines long- term stock prices.
The next method of stocks valuation depends on demand and supply. When the price of the stocks increases, more investors will want to purchase that stock. On the other hand, when price of the stock is low, more investors will want to sell off the stock. Therefore, it is difficult to forecast using this type of valuation. At the same time, this valuation method usually drives stock market trends in the short term.
Capital Budgeting Techniques
Capital Budgeting Techniques refers to a process that enables a company to determine where, when and which project to take up for investments. For example: to decide whether investing in a property development project or building a new factory is worth pursuing. However, the company needs to use capital budgeting techniques to evaluate which investment or project will yield the highest returns in a period of time as the availability of capital is normally limited when there are several projects available at the same time (Investopedia, 2012). In this situation, the company has to decide whether accepting or rejecting an investment or project by analyzing the cash flows generated through the investment over a period of time. Finally the company will select the investment or project that generates the highest value of cash flows which surpasses the cost of undertaking that investment.
Payback
Payback is the period determined by the years in order to recover the original cost of an investment. The payback period of a given project or investment is an important factor to determine whether to undertake the project or investment. However, the usual decision rule states that to accept project or investment that gives the shortest payback period. On the other hand, longer payback period usually is not appropriate for investment positions as long term project might give higher risk (Investpedia, 2012) (Appendix).
Discounted payback period refers as the number of years needed to breakeven to get back the initial outflow. Discounted payback period is similar to payback period whereby the only difference is that payback period ignores time value of money while discounted payback period considers time value of money which discounts the cash inflow from the project.
The discounted payback period is calculated using the present value (PV) of the cash flow (CF) whereby zero point starts as first year. Therefore, the company needs to set an appropriate discount rate (Accounting Explained, 2012). Formula to calculate the discounted cash inflow for each period: Discounted Cash Flow =
where, i = discount rate
n = the period that relates the cash inflow
However, in this formula it is divided into two components which are actual cash flows and present value factor i.e. : Therefore, cash flows and present value is the product of discounted cash flows (Accounting Explained, 2012). Discounted payback period uses the same method as calculating simple payback period whereby the only difference is that discount payback period uses discounted cash flows to calculate instead of using actual cash flows.
Net Present Value (NPV)
Net Present Value is a method used to determine capital budgeting projects (Block S. B. & Hirt G.A. 2005). Calculations for NPV are cash inflows for present value minus the cash outflows for present value. By using the cost of capital as a discount rate (Appendix).
NPV indicates the expected effect of the project towards the value of the firm. The higher the discount factor the lower the value of money. Therefore, positive NPV in a project shows that this project adds value to the firm. By following the NPV decision rules, all independent projects which have a positive NPV should be accepted. However, in mutually exclusive projects, NPV with the highest positive amount should be selected (Lane M.A. 2012)
NPV is a method which uses relevant cash flow while this method gives consideration on the time value of money. Thus, when the time value of money decreases to a certain percentage, it is called discount factor or cost of capital.
Where, r = the discount factor percentage
n = time
Discount Factor Formula =
Example of Net Present Value calculations (Appendix).
Internal Rate of Return (IRR)
In capital budgeting analysis IRR is used to access the feasibility of an investment proposal. However, IRR will be the next alternate techniques to Net Present Value (NPV). The feasibility of an investment is determined by the discount rate, which the NPV for all cash outflows (cost) with subsequent cash inflows for a specific project is equals to zero.
The higher IRR than the required rate return in an investment proposal means that it is more feasible that the project can be undertaken. In other words, the project will be rejected when IRR is lower compare to the required rate of return of the project. Whenever NPV is positive, IRR exceeds the cost of capital. This implication is that project can be undertaken and is a profitable investment. Nevertheless, this case is not applicable in mutually exclusive projects.
Example of Internal Rate of Return calculations (Appendix).
Differences in Security Valuation and Capital Budgeting
Capital budgeting is a method to compare, evaluate and select which project is worth undertaking. Therefore, to consider which project to select, the value of the project which is measured under capital budgeting is decided by the company. For example: Shell Malaysia is investing RM 800 million for building diesel processing plant in Port Dickson, Malaysia. Hence, the decision to invest RM 800 million value in the project is made by the company (Shell) (The Star Online, 2011).
Security Valuation is a method to calculate theoretical value of the securities, it can show whether the company is over or under valued. Securities can be classified under many categories such as bonds, debentures and shares. Therefore, for security valuation the value depends on the market whereby the company cannot determine its value.
Future cash flows of dividends are used when deciding the values of securities. As these cash flows cannot be determined by the company, the investors return on investment might be higher or lower. By implementing cost cutting measures to a certain extent, the company can control the cash flow used in the net present value (NPV) calculations
