NESTLE BHD Vs.

FRASER & NEAVE (F&N) BHD

TABLE OF CONTENTS

PAGE Acknowledgment--------------------------------------------------------- 1 Brief Description---------------------------------------------------------- 2 Comparative Time Series Analysis------------------------------------- 3 Capital Structure-----------------------------------------------------------4 Financial or Operating Leverage---------------------------------------- 5 Financial Structure-------------------------------------------------------- 6 Factors of Success-------------------------------------------------------- 7 Suggestion----------------------------------------------------------------- 8

ACKNOWLEDGMENT

First of all our thanks for beloved God almighty for giving us the knowledge to achieve this work therefore, best appreciation and respect go to our beloved lecturer,Mr. Mirza Vejzagic who has stood with us during the classes lectures and tutorials, breaking down this subject obstacles and complexities, by guiding us with rich information and professional mechanisms so we could understand the concept of this individual assignment and do it as it has been required. Finally we would love to thank all of the web content providers for their unlimited support like emerald and many other search website which real has filled the gap between the research and application. Finally great thanks go Limkokwing University Management for providing us with their useful facilities such library and its internet atmosphere.

BRIEF DESCRIPTION NESTLE BHD : Nestle is an International company which set up subsidiary in Malaysia. It began with the Anglo-Swiss Condensed milk Company in 1912 and was starting to develop until now. With the vision, Be the leading multinational company in food, nutrition and wellness and several missions like Utilize well the local raw material, Take care well the Environment and Produce HALAL food for Malaysian market, Nestle operate in Malaysia until now employing approximately 5000 employee. Nestle provides several range of product like Milo (Dairy product), Nescafe, Purelife and other range of product.

FRASER&NEAVE (F&N) BHD : Fraser and Neave (F&N) works in the consumer-related product, especially soft drinks and dairies. F&N based in Singapore, founded by John Fraser and David Neave, it formed a subsidiary in Malaysia in 1884. With a vision, To become the leading total beverage company in Malaysia and the region and mission, To be a world-class multinational enterprise providing superior returns to our shareholders, excellent value for our customers and a rewarding career for our employees,F&N works in Malaysia successfully in providing range of product. Several type of F&N product are CocaCola (under the license of Coca Cola Company USA), 100Plus (isotonic drink), Magnolia (Dairy product), Sunkist, and the other range of product.

COMPARATIVE TIME SERIES ANALYSIS

1. Ratio Analysis: I. Liquidity Ratio: - Measure the power of the company to fill up the short-term obligation. If the company is failed to do so, it will drive to failure and bankruptcy. Soon after, the company will end into liquidation to return all outstanding debt. The liquidation converts all the companys asset into liquid or cash to return to the creditors and shareholders in case of bankruptcy. There are 3 ratios in measuring the liquidity of the company, Working Capital, Current Ratio and the last is Acid-test Ratio.

i.

Working Capital:

Measures the ability of a company to cover up the short-term debt with its current assets. It only measures brief position of the companys liquidity. The ideal result for working capital is positive (+) figure. The positive figure means that the company can cope up with the current liability over their liquid assets. Other than positive figure means the company unable to repay their short-term debt and highly risk in bankruptcy. The formula for working capital is shown below:

Working Capital = Current Asset Current Liability

Company Working Capital

Nestle 114091 55817 = 58274

F&N 1217702 717301 = 500401

From the working capital, Nestle had a positive figure for RM 58274. It means that the company had high liquidity. It didnt risk in bankruptcy and liquidation, because with the current asset of the company can cover up the short-term debt. Nestle must maintain and

increase their current asset in order to put the company in a safety position. At least, they must maintain the working capital on positive figure to makes sure that they always on the safe position. On the other hand, F&N has a very good position in working capital. The company was liquid enough to cover up the current debt with the current

assets. F&N is on a safety position in the 2011. F&N should maintain the liquidity position like that. For the comparison, the position of the liquidity of these two companies has a slightly difference. F&N has a very good liquidity compared than Nestle. Nestle must set another strategy in order to have a better liquidity. However, with working capital alone, the user of the financial statement cannot easily decide the companys liquidity. There are two other liquidity ratios that can be used for further decision-making.

Current Ratio Current ratio is the measurement of the company to fulfill the short-term obligation. On the other words, current ratio can simply define as the power of the company to repay their debt over the following year, it represents the day-to-day operations, like buying the raw material, paying the short-term loan by creditors, etc. the ratios can be calculated by dividing the current asset with the current liability. The ideal number for this ratio is in the range of one to two. But according to Kennon(2010), the current ratio of 1.5 is quite good for industrial company. The equation can be express as follow:

Current Ratio = Current Assets / Current Liability

Company Current Ratio

Nestle 33324 / 35232 = 0.9458

F&N 1217702 / 717301 = 1.6976

By looking at the current ratio of Nestle for 0.9458, Nestle has borderline liquidity. It means that each ringgit of the current debt, Nestle only has RM 0.95 for returning the debt. Since the ratio below 1, Nestle is highly risk in bankruptcy, because they will not be able to meet their short- term obligations. The current ratio of F&N is

quite good. From the financial statement of F&N we can calculated the current ratio for 1.70. F&N can cover up all short-term obligations with the current assets that F&N has. For comparison, there is difference for 0.75 in current ratio of both the companies. Just like the previous working capital, F&N has better liquidity than Nestle.

Acid-test(Quick)Ratio The acid-test ratio is the ratio measuring the ability of the company to convert most of the current asset into cash to repay the current liability in a very short time, considering days and months. It named as acid because its measures the firm for a very short period, since acid is very fast affecting the victim. In the acid-test ratio, the formula is nearly the same with current ratio, but it excludes the stock in the current asset. This is because stock is not easy converted into cash. Result in the range of 0.9 to 1.00 is acceptable for the acid-test ratio. The acid-test ratio formula can be shown as follows:

Acid-test ratio = (Current Asset Stocks) / Current Liability Company Acid-test Ratio Nestle (33324 15897)/35232 = 0.4946 F&N (1217702 717301)/770200 = 0.6497

Acid-test result also gives the same result for the both companies. Nestle has a portion 50-50 on their current asset with the stock which made the position of Nestle is worsen. Nestle will not be able to pay even half of current debt. Nestle is in a very dangerous situation. If Nestle did not do anything to the current liability, Nestle will be easily come into bankruptcy.

F&N has a better position in 2011 rather than Nestle which has low liquidity in the following year. F&N has higher value on working capital, current ratio and acid-test ratio than Nestle. For overall liquidity ratios, F&N has better position than Nestle.

II.

Gearing Ratio Debt ratio: The debt ratio equation explained as follow: Debt Ratio = Total Debt / Total Asset Company Debt Ratio Nestle 1144,646 / 1660401 = 68.94% F&N 1196933 / 2514089 = 47.61%

Nestle had a quite high debt ratio of 68.94% for the year 2011. The high level of debt indicates high risk that the investor will take. Therefore, the investors will ask for higher return/dividend for each share invested in Nestle. On the other hand, F&N has debt ratio for 47.61%, which is lower than 50%. It indicates that F&N has quite good position on debt ratio. The risk of F&N eventually lower and the return that F&N should pay will be lower than Nestle. Both of companies have debt ratio lower than 100%, so both of it are still using the equity in financing the companies. Investors might find lower risk in the investment in the company since the company still in low-leverage firm.

Long Term Debt Ratio: The long term debt ratio formula can be described below:

Long Term Debt Ratio = Long Term Debt / Total Asset Company Long Term Debt Ratio Nestle 114189 / 1660401 F&N 426733 / 2514089

= 6.88%

= 16.97%

The analysis of long term debt ratio describes that Nestle did not utilize well the long term debt. Only 6.88% of the debt in each single ringgit of asset and it was considered too low for the manufacturing company like Nestle. Nestle must utilized well the long term debt in order to maximize the debt financing and to deduct the tax as well. F&N utilize better the long term debt than Nestle done. F&N has 16.97% of long term debt in each ringgit of assets. So, we can say that F&N utilize the long term debt better than Nestle.

CAPITAL STRUCTURE Based on the ratio analysis, it shows that the structure of the F&N is better than Nestle which are RM 500401 and RM 58274 respectively for the working capital. Both show the positive figure, but there are need some changes to be working for, for the Nestle company to be high in the liquidity. With this figures F&N might be looking more attractive than Nestle. But there is still chance for Nestle to be better as this figure going increase year by year.

FINANCIAL AND OPERATING LEVERAGE

REVENUE

Revenue trends index show that Nestle has a gradual increase in 5 years. Revenue of Nestle increases for average of 11% every year. F& N revenue increases gradually in 2008 and 2009. Then, in 2010 and 2011 F&Ns revenue increase significantly to 177% and 219%. This indicates that F&Ns took over of Nestls dairy (Thailand) company was successful. Take over for RM 310million increase the revenue for 54% in 2010 and 42% in 2011. Trends analysis indicates that in the next year there will be significant increase for F&Ns revenue. However, Nestle has invested for the development of Nestls manufacturing and technology facilities in 2007. One of the developments is the air-dried noodle for the so called Maggi noodle. Since the turnover of Maggi noodle 1.3 million per day, it was believed that the technology will boost the revenue in the future.

Cash flow From Operating Activity

Operating activities trend indicates that, both of these companies are having fluctuation in the cash inflow from the operating activity. Nestle has fluctuative cash flow from 2008 to 2011 and increase significantly in 2011 f0r 168%. Thus, F&N has significant declining in the cash flow, especially in 2008 and 2009, drop for 71% and 60% respectively. Moreover, F&N also has significant increase in 2009 and 2011 for 184% and 204% respectively. The fluctuation happened to both companies can be treated as market effects to the company. But, F&N has better performance in year 2009 and 2011 as it perform well after the grave performance, even the grave performance of F&N worse than Nestle. In 2012, there will highly probable that both of companies will enter the grave performance and enter good performance in 2013.

FINANCIAL STRUCTURE

Cash flow in Investing Activity

Nestles investing activity increased year by year, but in 2011 there is significant increase for almost 150%, due to the investment of factory in Shah Alam. F&N on the other hand, has a significant cash outflow for the year 2009 for the take over and acquisition of Nestle Dairy. These investing activities of both companies believed to be successful in the upcoming years.

FACTORS OF SUCCESS

o FREASER & NEAVE (F&) BHD. : F&N remains steadfast in its multiple-business model. Its mission is to be a leading Asian-based company focused on a balanced portfolio comprising Food & Beverage, Properties and Publishing & Printing, with significant business presence in overseas markets and renowned for its product quality, brands, sound management and reputation of delivering value to all its stakeholders. Whilst three businesses may appear seemingly unrelated, it has built up market leadership positions in each of the business as well as strategic capabilities over the years in brand management, extensive marketing expertise, distribution networks, and financial strength and discipline, which are applicable to all its businesses. F&N is one of the few companies with brands that transcend borders. Its priority is to drive earnings, placing emphasis on being asset-light, product extensions, growing in newer geographical markets, sound capital management and maintaining a balanced business portfolio. F&N is looking at monetizing its investment properties progressively and redeploying the proceeds to higher-yielding ventures within the three core businesses. With sustained earnings growth, F&N can continue to pay generous dividends to shareholders.

o NESTLE BERHAD:

1. Localization amidst globalization: Successfully achieving localization in the increasingly globalized food industry Product planning, production, marketing and services form a strategy of successful localization of a global company Nestle has 2 organizations that focused on leveraging its global reach to achieve operational efficiencies: GLOBE and GNBS provide the process, organization and technology infrastructure to allow Nestl to leverage its global

size. GNBS will enable Nestl to leverage its scale to increase the efficiency and effectiveness of its "back office" whilst enabling the markets and businesses to focus on demand generation and profitable growth Nestls Swiss sales is only 2% of their total global sales 2. Global brand strategy: Nestle has products that resonate all over the world under a unified brand These brands are unified under the Nestle banner, which delivered a value and reputation of a global food company while the products delivered its own specific attributes The global corporate brand was the brand platform for delivering localized products and brands Nestle has built global brands such as Nescafe, Nesquik, Nestea, Tasters Choice, Haagen-Dazs 3. Successful M&A: Nestle has grown thru organic growth but really thru successful M&A Nestle has acquired to enter both emerging and developed markets, and new product categories Clear strategic focus: Food & Beverages, Nutrition, Health & Wellness, adjacencies to existing core businesses

SUGGESTION

If I was the CFO I will suggest for both companies to provide capital flexibility, delivering
data-backed insight to make informed decisions, building transparency into capital-allocation decisions, and knowing when to be opportunistic, CFOs can help their companies responsibly pursue growth and innovation in a weak economy. Providing capital flexibility that allows a company to grow organically and invest opportunistically during downturns without putting the bottom line at risk is one of a CFOs most important jobs. So in my role as CFO, I need to make sure we have the balance-sheet strength that allows us to pursue our strategies while continuing to invest in our infrastructure and improve performance, all while protecting financial stability.
If you had in the stock five years ago, how would you have performed? How have the stocks performed relative to one another? Is the stock performance reflective of the firms performance as you have analyzed earlier?

If I had in the stock five years ago, I will keep the level of stock sensible. I would striking the right balance between having a suitable range of products in stock versus running up debts with my suppliers is a tricky one. The skill of buying will be fundamental to businesss success or failure. If I am shifting fairly large quantities of relatively few items then I can work it out mathematically, using the average supplier lead times and the number of items I am selling each day, but in many cases. I will go with experience and use all the reports I have available to help me make the right decision. Use a comprehensive Stock Keeping Unit(SKU) structure to help my produce sales reports on my various product items to not get sucked-in by suppliers end-of-line discounts. On the other hand, it is essential for me to do control on stock because the stock will give effects to the performance of the company as financial risk is high if stock levels are high. I would keep an adequate supply of stock which has a quick turnover. If stock is a slow seller,i would not increase volumes whatever the price and I would maintain good stock levels but didnt retain obsolete or old stock.