Finance & Strategy

Nottingham University Business School
MBA Programme
Accounting and Finance

N14M01
Nestle Malaysia Bhd
An Assessment of Financial Performance,
Sustainability and Strategy
Sirsanath, BANERJEE, ID : 014803

Alwyn Chee Hua, KOAY, ID : 015855
Shen Yang, KUAH, ID : 016302
Ling Kim, LEE, ID : 015871
Shing Loo, LIM, ID : 016301
(Word count 4223)
COPY 1
Nottingham University Business School

MBA Programme
Accounting and Finance

N14M01
Nestle Malaysia Bhd
An Assessment of Financial Performance,
Sustainability and Strategy
Sirsanath, BANERJEE, ID : 014803

Alwyn Chee Hua, KOAY, ID : 015855
Shen Yang, KUAH, ID : 016302
Ling Kim, LEE, ID : 015871
Shing Loo, LIM, ID : 016301
(Word count 4223)
COPY 2
Executive Summary
This report serves to outline our review and findings of the companys financial position and
performance, strategic and sustainability initiatives within the packaged foods of the F&B industry
within Malaysia, in order to provide recommendation for future improvements.
The main findings of the review are as follows:
Overview:
Volatile global economy since 2008 has given rise to unstable growth in industries worldwide,
nonetheless, Malaysia and the F&B industry are generally resilient towards this volatility, and the
general outlook for future performance is on a moderately positive direction.
Our SWOT analysis indicates multiple strengths and concurrent opportunities and threats to be
addressed, while the Porters 5 Forces Analysis has shown that the industry outlook is generally
favourable towards our company, largely due to our strong brand name and position.
Key Financial Ratio Analysis:
Overall, the financial ratios fall within an average industry performance, however, more attention
should be directed towards the liquidity position which could potentially affect the overall
performance in the near term. Generally operating efficiencies and return on equities are wellmanaged for maximising shareholders value.
Corporate Governance:
Corporate governance is well addressed within the company although more efforts towards
transparency in terms of figure justifications in the company financial statements should be strictly
adhered to boost shareholders confidence.
Sustainability:
We have pioneered the Malaysian F&B manufacturing industry in terms of implementing GRI
reporting practices, while actively integrating CSR activities into our value chain. This has
significantly added value to our business performance in terms of operational efficiencies and added
brand equity.
Moving forward, we have highlighted the recommendations for future improvements which are
outlined at the end of the report.
Contents
List of Figures......................................................................................................... 2
List of Tables.......................................................................................................... 2
List of Abbreviations.............................................................................................. 3
1) Introduction..................................................................................................... 4
2) Environmental Overview.................................................................................4
2.1) Global and Malaysian Economy Outlook.....................................................4
2.2) The Industry Outlook..................................................................................5
3) Companys Information...................................................................................... 5
3.1) Companys Background.............................................................................. 5
3.2) Product and Service Offerings and Segmental Analysis.............................6
3.3) Industry Analysis........................................................................................ 7
3.4) SWOT Analysis........................................................................................... 9
3.5) Future Prospects....................................................................................... 10
4) Quantitative Analysis (Financial Ratios).........................................................11
4.1) Profitability Ratio..................................................................................... 11
4.2) Activity Ratio........................................................................................... 13
4.3) Liquidity Ratio......................................................................................... 15
4.4) Leverage Ratio........................................................................................ 17
4.5) Checklist of Ratio..................................................................................... 18
4.6) Trend Analysis......................................................................................... 19
4.7) Common Size Analysis............................................................................19
5) Qualitative Analysis....................................................................................... 20
5.1) Integrated Reporting Creating Shared Value...........................................20
5.1)
Corporate Governance............................................................................ 22
5.2)
Earnings Management............................................................................ 22
5.3)
Sustainability.......................................................................................... 23
6) Conclusion and Recommendations................................................................24

7) Reference...................................................................................................... 26
LIST OF FIGURES
Figure 1 Nestl Operative Functions................................................................................. 5
Figure 2 Nestl Sales by Product..................................................................................... 6
Figure 3 Nestl Channel Sales........................................................................................ 7
Figure 4 Porters 5-Forces for Nestl................................................................................7
Figure 5 Return on Equity Ratio.................................................................................... 11
Figure 6 Gross Operating Margin.................................................................................. 12
Figure 7 Profit Margin Ratio........................................................................................ 12
Figure 8 Average Collection Period................................................................................ 13
Figure 9 Average Age of Payables.................................................................................. 14
Figure 10 Average Number of Days in Stock....................................................................14
Figure 11 Total Assets Ratio......................................................................................... 15
Figure 12 Current Ratio.............................................................................................. 15
Figure 13 Cash Ratio.................................................................................................. 16
Figure 14 Debt to Equity Ratio..................................................................................... 17
Figure 15 Index Number of Nestl.................................................................................19
Figure 16 Nestl's Governance of CSV, Sustainability and Compliance....................................20
Figure 17 Development of CSV Strategy Globally and How it Rolled out in Malaysia.................20
Figure 18 Nestl Creating Shared Value Concept Components..............................................21
Figure 19 Nestl's Shared Value.................................................................................... 21
Figure 20 Nestl's Sustainability Indicator.......................................................................23
LIST OF TABLES
Table 1 SWOT Analysis................................................................................................ 9

Table 2 Table of Checklist........................................................................................... 18
Table 3 Sustainability Activities Undertaken by Nestl from 2009 to date Error! Bookmark not
defined.
LIST OF ABBREVIATIONS
Abbreviation
A&P
ACCA
BOD
CSR
DL
F&B
F&N
FMCG
GBP
GRI
GST
IFRS
KLSE
MCCG
MD
Nestle / Our
Complete Term
Advertising and Promotional
Association of Charted Certified Accountants
Board of Directors
Corporate Social Responsibility
Dutch Lady Milk Industries Berhad
Food and Beverage
Fraser & Neave Holdings Berhad
Fast Moving Consumer Goods
Great Britain Pound
Global Reporting Initiatives
Goods & Services Tax
International Financial Reporting Standards
Kuala Lumpur Stock Exchange
Malaysian Code of Governance
Managing Director
Nestle Malaysia Berhad
Company
SGD
THB
USD
Singapore Dollars
Thailand Baht
U.S. Dollars
1) INTRODUCTION
The Malaysian economy has been in a volatile position since the 2008 sub-prime recession. Coupled
with increasing costs of living but stagnant disposable income, this has led consumers trending
towards cheaper alternative goods in the market. The BOD of Nestl is concerned with the situation
and has requested a strategic and financial assessment of the Companys performance over a 5 year
period, benchmarked against two major competitors.
Nestl is a leading F&B Company in Malaysia with 75% of sales derived from the Beverage and
Dairy segments. As such, two other major players in the market, F&N and DL, who operate in similar
segments, are selected for benchmarking purposes.
This report initiates with an overview of the global economy and events, subsequently covering
background and situational analysis via SWOT and Porters Five Forces Analysis. Further, the
quantitative (financial ratios) and qualitative (corporate governance and sustainability) would also be
discussed. The report shall end with an overall conclusion on our performance and recommendations
for improvement.
2) ENVIRONMENTAL OVERVIEW
2.1) Global and Malaysian Economy Outlook
The World Bank (2014) forecasted that the 2014 global economy is expected to be bumpy, while
anticipating stagnant growth in developing countries. Notwithstanding the above, the Malaysian
economy is expected to be experience positive growth with an improved business environment (World
Bank, 2014).
The global economic outlook exerts influence in the local food production scene most notably via the
increasing commodity prices, directly affecting raw material costs of production. Current significant
event being the Ebola outbreak in the Africas, a cocoa producing continent, where cocoa powder and
related commodity product prices are increasing due to the restricted accessibilities to the locations of
produce.
The instable global economy and events are risks for us as we import several raw materials from other
countries. Hence, consistent awareness towards our surroundings given the exposure to different
economic conditions is much needed to sustain good business performance.
2.2) The Industry Outlook

The Economic Report of Malaysia (2014), outlines favorable growth in the F&B industry for the
years 2014 and 2015. A further nascent trend observed includes the ever-changing demographic
profiles leading to increased consumption on consumer segments; the role of technology and online
shopping; and significant focus on inclusive development for the community and environment.
However, Malaysian governments GST implementation on 1 April 2015 may pose a negative factor
for consumer sentiments, and this may impact revenues and profit prospects of the company in the
coming financial years 2014-2015. It will be a pivotal year ahead to ensure that Real Internal Growth
is maintained amidst heavy capital expenditure incurrence, coupled with possibilities of a slowdown
in consumer spending. Nonetheless, Choong (2014) has advised that the F&B industry could claim
an input tax refund based on the final GST paid.
3) COMPANYS INFORMATION
3.1) Companys Background
Nestl Malaysia Berhad has its roots in Malaysia for more than a century, starting out as the AngloSwiss Condensed Milk company producing sweetened condensed milk since 1912. Listed in KLSE
since 1983 with a market capitalization of RM 16 billion, it has evolved into a major player in the
Malaysian F&B industry with turnover of RM4.8 billion in year 2013 and 300 products commanding
almost 50% of the processed food market share. (The Malaysian Insider, 2014).
Up to 95% of products are manufactured locally, with 7 manufacturing bases nationwide spread
across Peninsular and East Malaysia; and a National Distribution Center. Equipped with a 5,800
people-strong workforce, the size and scale of our dominance in the Malaysian processed food
segment is greatly reflected. Further, we append the Companys operative functions as follows:-
Figure 1 Nestl Operative Functions
Under the purview of the Zone Asia Oceania and Africa (Zone AOA) segment within Nestl Globals
management structure, we have reasonable control and autonomy to suit and adapt business
operations to the local and regional needs, while aligned closely to our global Swiss parent Nestl SA.
Our mission is to be a leader in Nutrition, Health and Wellness, and to be the industry reference for
financial performance (Nestl Global, 2014). With this, we are proud to report that our growth stays
consistent with our global mission, whereby financial performance is on an improving trend over the
past five years.
3.2) Product and Service Offerings and Segmental Analysis
Nestl Malaysias businesses span across product categories of the F&B umbrella with the Beverage
and Dairy segment being the major contributor followed by Foods. A recent sales segregation by
product categories is appended in the next chart.
Source: Nestl Malaysia Analyst Briefing 11 Nov 2013 s.9

Figure 2 Nestl Sales by Product
From a geographical perspective, a quarter of Nestl Malaysias revenues are from export sales to its
counterparts in the region (Fig. 3), largely due to increasing Halal products demand. Today, Nestl
Malaysia is the biggest Halal producer amongst the Nestl world and prides being the Halal Center of
Excellence for the Nestl Group.
Figure 3 Nestl Channel Sales
3.3) Industry Analysis

In Malaysia, the food processing sector is largely fragmented with small and medium enterprises
representing more than 80% of the total number of establishments throughout various product
categories (Market Watch, 2012). Nestl Malaysias industry analysis based on the Porters 5-forces
is as follows:-
Figure 4 Porters 5-Forces for Nestl
The outlook seems to be in our favour albeit having a fragmented industry with strong existing
substitutes and relatively high supplier concentration. The threats of potential entrants are relatively
deterred due to unrealistic production economies of scale being either unfeasibly small or expensively
large; in terms of capital outlays for a production setup and effective distribution force.
Nonetheless, substitute threat is significant over the long term due to price sensitivity being prevalent
in this sector, as this is attributed to an effect of a commoditization risk where dominant Nestl
products are subject to me-too lower priced house brands, resulting in our market share erosion in
the long run.
Despite these real challenges, we remain resilient due to the strong brand value and effective
distribution network which are vital factors for this industry.
3.4) SWOT Analysis
Table 1 SWOT Analysis
3.5) Future Prospects

From a corporate perspective, our new MD, Mr Alois Hofbauer (appointed 1 Jan 2013) spearheads the
company towards a good start with the execution of CAPEX commitments in strengthening
manufacturing capabilities within the liquid drinks and confectionery sector, we are confident in his
lead towards sustainable growth in the right directions.
Continuously strong and efficient A&P activities is key to ensure consumer top of mind reflected
through recent A&P executions such as the Nestl More Goodness, More Value campaigns which
stresses on enhanced value (The Malaysian Insider, 2014). Simultaneously, prudent operations
management for cost efficiencies, in line with sustainability efforts are also vital in adding value to the
product life cycle. This shall facilitate in maintaining healthy growth and to mitigate possibilities of
slowdown in sales.
It is also vital to address alternative channel distribution strategies as increased dependence on Key
Account customers such as Giant, Tesco, Jusco, and Carrefour will lead to a proliferation of loss
leader pricing. This will only erode Nestls brand equity and poses a huge risk in safeguarding the
strong leadership positions amongst brands such as MILO, NESCAFE and MAGGI. (Bouckley, 2012)
4) QUANTITATIVE ANALYSIS (FINANCIAL RATIOS)

As part of our assessment of the Companys performance, our financial ratios are computed and
benchmarked against our competitors. A detailed computation is available in the Appendices.
4.1) Profitability Ratio
10
RETURN ON EQUITY RATIO

0.80
0.70
RATIO
0.60
F&N
0.50
DUTCH LADY
0.40
NESTLE
0.30
0.20
0.10
0.00
2009
2010
2011
2012
2013
Figure 5 Return on Equity Ratio
Overall, our ROE value is increasing at a steady manner within the 0.6 - 0.7 range over a period of
five years, mainly attributable to the simultaneous increase in sales and equity. Although DL appears
to have a better ROE ratio compared to us in 2013, their retained earnings in equity is in fact on a
decreasing trend and this may indicate a negative growth on their part.
It was noted that F&N experienced a substantial drop in their ROE from 2011 onwards mainly due to
a drop of net income from 2011 to 2013. Losing the distribution rights of Coca Cola have significantly
impacted their income as it contributes 30% of the groups business (27 June 2011) (The Star, 2012).
As mentioned in Malaysia Corporate Digest (2013). Notwithstanding, plummeting sales during years
2012 and 2013 were also due to the inventory loss as a result from the Thailand floods and relocation
of a new plant in Pulau Indah, Klang (October 2011).
11
GROSS OPERATING MARGIN

0.45
0.40
0.35
F&N
0.30
DUTCH LADY
0.25
RAITO
NESTLE
0.20
0.15
0.10
0.05
0.00
2009
2010
2011
2012
2013
Figure 6 Gross Operating Margin
Based on the above gross profit margin, it appears that our Company is in a better position compared
to F&N and DL. However, all three companies noted increases in operating expenses, mainly
attributed to price hikes in several commodities such as milk solids and cocoa powder (BorneoPost
Online, 2011).
Kennedy (2014) reports that the price of cocoa beans are expected to increase continuously due to
recent external threats such as the Ebola epidemic in the Africas, a main supplier for cocoa. This is
not favourable as cocoa is our main raw material for several products.
PROFIT MARGIN RATIO

0.16
0.14
RATIO
0.12
F&N
0.10
DUTCH LADY
0.08
NESTLE
0.06
0.04
0.02
0.00
2009
2010
2011
2012
2013
Figure 7 Profit Margin Ratio
12
In addition, an increasing trend in our profit margin can also be observed despite having higher
expenses. Based on the 2013 Annual Report, our exports have decreased over the past year; while
concurrently incurring higher marketing expenses to boost domestic demand to make up for the
export decreases. In doing so, we have also launch several new products (e.g. Greek Yogurt) to the
Malaysian market during the period.
Nonetheless, the expenses mentioned above prove to be worthwhile investments as higher net profit
was reflected.
In short, relative to our competitors, our profitability ratios indicate that our performance are on a
positive note.
4.2) Activity Ratio
AVERAGE COLLECTION PERIOD

70.00
60.00
F&N
50.00
DUTCH LADY
40.00
DAYS
NESTLE
30.00
20.00
10.00
0.00
2009
2010
2011
2012
2013
Figure 8 Average Collection Period
13
AVERAGE AGE OF PAYABLES

140.00
120.00
F&N
100.00
DUTCH LADY
80.00
DAYS
NESTLE
60.00
40.00
20.00
0.00
2009
2010
2011
2012
2013
Figure 9 Average Age of Payables
As observed from the above figures, our company enjoys a payable period of over 3 months whereas
the sum of collection period from our debtors is slightly over 1 month. Based on the result, it
indicates that our trade debtors have been paying their debts at a timely manner whereas our creditors
have leveraged at our reputational brand name and hence, allowing us longer repayment terms (Elliot
and Elliot, 2009).
While it may seem an advantage, it is advisable for the Company to monitor and shorten the payable
period to ensure good supplier rapport is maintained.
AVERAGE NUMBER OF DAYS IN STOCK

90.00
80.00
70.00
F&N
60.00
DUTCH LADY
50.00
DAYS
NESTLE
40.00
30.00
20.00
10.00
0.00
2009
2010
2011
2012
2013
Figure 10 Average Number of Days in Stock
14
On average, our stock turnover falls between 2-3 months and has been reducing since 2012. On a
positive note, this indicates that there are more demand for our products in the market and as such, the
stock turnover became sooner. We expect the above trend to continue in the future from our active
marketing and promotional activities.
TOTAL ASSETS RATIO

3.00
2.50
F&N
2.00
RATIO
DUTCH LADY
NESTLE
1.50
1.00
0.50
0.00
2009
2010
2011
2012
2013
Figure 11 Total Assets Ratio
Generally, our total assets ratio is consistent and this indicates the efficiency of assets in generating
sales. However, in year 2013, we observe a slight decrease and DL has outperformed us, this is
mainly attributable to our investment in additional capacity (i.e. factory) in Shah Alam to enhance
production capacity, the factory commenced operation in May 2014 (The Edge, 2014). We expect
total assets ratio to improve in the near future.
4.3) Liquidity Ratio
15
CURRENT RATIO
3.00
2.50
F&N
2.00
RATIO
DUTCH LADY
NESTLE
1.50
1.00
0.50
0.00
2009
2010
2011
2012
2013
Figure 12 Current Ratio
CASH RATIO
1.60
1.40
RATIO
1.20
F&N
1.00
DUTCH LADY
0.80
NESTLE
0.60
0.40
0.20
0.00
2009
2010
2011
2012
2013
Figure 13 Cash Ratio
Generally, our current and cash ratio is unfavourable compared to our competitors. The decrease is
mainly due to a significant reduction in cash and bank balances as well as bank deposits. Our trade
and non-trade payables to related companies constitute a huge portion of current liabilities (about
95%) and they are unsecured, interest free and repayable on demand. However, our liquidity
continues to be constrained due to low current asset levels and weak cash positions. Our company
witnessed several trade and non-trade payables to related parties during the current financial year
(for eg. an increase from RM1m in 2012 to RM80m in 2013 payable to related companies).
16
Our receivables are partially secured either by bank guarantees or traded shares. As at the end of the
reporting period, the total collateral assigned to the Group was RM51,887,000 (2012:
RM62,866,000). (Nestle Annual Report, 2013)
A further discussion on the above is available in Appendix 37 under the Earnings Management
section.
Moreover, our company has notable foreign exchange transactions and is exposed to currency risks
essentially with the current volatile global economy. The rising inflation and weaker Ringgits could
have an adverse impact on Nestl (The Star Online, 2014). It is advisable for us to improve our
working capital position to avoid cash shortage during emergency situations.
4.4) Leverage Ratio
DEBT/EQUITY RATIO
0.70
0.60
F&N
0.50
DUTCH LADY
0.40
RATIO
NESTLE
0.30
0.20
0.10
0.00
2009
2010
2011
2012
2013
Figure 14 Debt to Equity Ratio
Our leverage ratio has decreased substantially over the five years. We have reduced our total
borrowings by 76% in the year 2012 vide repayment of loans from a related company (Nestls
Annual Report, 2012). Further, our Company shareholders equity has also increased, which is
reflected in the retained earnings and reserves of the Company. This is a positive indication as we
have more capital to invest in the research and development activities instead of financing it via thirdparty borrowings, which could lead to potential default risk and high interest payment.
17
We appear to be in a better position than F&N as the debt-equity ratio appears to be lower while the
Company, despite being an established brand, continues to grow consistently. Moreover, we are also
better than DL as although the latter is prudent in taking any borrowings, its equity is on a decreasing
trend, which potentially indicates they are not maximising their shareholders value.
Generally, we are not a highly-leveraged company. However, awareness in this current economy
trend would be advisable, essentially in the current economy situation which is highly volatile.
4.5) Comparison of Nestls performance vis--vis F&N and DL
Nestl
F&N
Dutch Lady
PROFITABILITY RATIO
Return on Assets Ratio
Return on Equity Ratio
Profit Margin Ratio
Gross Operating Margin
ACTIVITY RATIO
Average Collection Period
Average Number of days in stock
Average Payable Period
Total Assets Ratio
LIQUIDITY RATIO
Current Ratio
Quick Ratio
Cash Ratio
LEVERAGE RATIO
Interest Coverage Ratio
Debt Equity Ratio
Score
1/13
1/13
11/13
Table 2 Comparison of Nestls performance vis--vis F&N and DL
18
The financial ratios indicate that our Companys performance is average and DLs performance is
ahead of us. However, based on our analysis, our overall assets and income are larger than DL.
Moreover, DLs equity has shown a reduction trend over the years, which actually indicates that they
are in a more unfavourable position than us.
Nevertheless, we are should improve our cash management system as our liquidity ratio is relatively
weak. Frank and Goyal (2008) has warned that poor cash management could negatively impact a
Companys operational sustainability and growth potential. Further, should there be an event of
financial distress, we may face difficulties in terms of cash and this could depreciate our shareholders
confidence.
Given DLs smaller size and decreasing equity, it is arguable that our overall performance is in fact
better than our competitors over the past 5 years and we have portrayed better utilization of our assets
to generate sales as well as improving our shareholders wealth.
4.6) Trend Analysis
INDEX NUMBER OF NESTLE

180.00
INDEX
160.00
Turnover
140.00
Operating Profit
120.00
Net Profit
100.00
2009
2010
2011
2012
80.00
2013
Figure 15 Index Number of Nestl
Based on the above, we recorded a steady growth of 5-7 % over a 5 years duration in all turnover,
operating profit and net profit.
In terms of operating profit, the highest percentage change in growth was recorded on year 2011
(18.86%) and the growth percentage is in a decreasing trend up to 2013. According to the annual
reports, the apparent reason was due to loss recorded in cash flow hedging. In addition, we are also
exposed to foreign exchange risk, essentially in the process of sales and purchases with foreign
19
countries. Based on the annual reports, the currencies which could lead to the above risks includes
SGD, USD, GBP and THB.
However, according to Elliot and Elliot (2009), while trend analysis provides a quick summary on the
financial statements performance, it omits inflation outcomes into consideration and thus, do not
signify a Companys actual performance.
4.7) Common Size Analysis
Elliot and Elliot (2009) have explained that the main benefit of common size ratio is to facilitate the
comparisons for companies of different sizes. We have conducted the above comparisons and it is
available in the Appendices.
The analysis concludes that our Companys performance is average compared to our competitors.
Similar to the financial ratios, it appears that DL is generally better at managing their expenses (e.g.
Cost of Sales). However, as highlighted in the annual reports, our Company have been incurring
higher marketing expenses to boost domestic sales and launch of new products.
We expect
improvement in expenses in the near future.

The common size Balance sheet has also shown that our Companys current liabilities comprise of the
highest related party transactions, which may trigger shareholders scepticism as no clear justification
is provided in the financial reports.
5) QUALITATIVE ANALYSIS
5.1) Integrated Reporting Creating Shared Value
Tan et al (2013) encouraged firms in Malaysia to commence with the Integrated Reporting practice as
it is associated with several benefits including greater transparency and enhancing brand value.
Generally, we are conscious on linking sustainability issues in the organizations overall strategy and
have demonstrated and clearly illustrated adherence to the disclosures as set out in the Global
Reporting Initiative G3 Sustainability reporting Disclosure guidelines in the recent 107-page Nestl in
Society: Creating Shared Value and Meeting Our Commitments 2013 report (pages 64-101), a sample
page is enclosed in the Appendix (Aghashahi et al, 2013 and Nestl, 2000).
20
Figure 16 Nestl's Governance of CSV, Sustainability and Compliance
Figure 17 Development of CSV Strategy Globally and How it Rolled out in Malaysia
Figure 16 and 17 illustrate how Nestls inclusion of Governance and Sustainability initiatives within
their strategic executions of the company is being carried out. Generally, the Creating Shared Value
concept resonates with the fundamental of businesses in creating shareholder value for business
owners and the society and encompasses the following components:-
Figure 18 Nestl Creating Shared Value Concept Components
21
Furthermore, the Shared Value concept is also applied across our Value Chain of suppliers,
manufacturers and consumers vide the product life cycle approach. It addresses the impact on the
value chain without comprising growth, and creating win-win situations for the benefit of both Nestl
and the society.
Source: Nestl CSR Presentation

Figure 19 Nestl's Shared Value
Moving forward, we shall deliberate on the 2 qualitative aspects in relation to our financial
performance through Corporate Governance and Sustainability.
Kolk (2006) commented that corporate transparency is significant as it represents a Companys
accountability to its stakeholders. In addition to quantitative performance, accountability should also
include corporate governance which assess a Companys independence and sustainability reporting
that focuses on a Companys triple bottom line (i.e. economic, environmental and social) activities.
(Schooley, Renner and Allen (2010) and Kolk (2006)).
5.1)
Corporate Governance
The Institute of Chartered Accountants of England and Wales (2008) has defined corporate
governance as a system controlled by a Company.
It concerns with the relationship and
responsibilities of the board, management, shareholders and other relevant stakeholders within a legal
regulatory framework. Generally, Nestl has excellent corporate governance system evidenced by the
22
structure and independence of the Board of Directors and its internal controls etc. The MCCG 2012
has been used to benchmark our Companys practice and is presented in Appendix 36.
Meanwhile, F&N and DLs corporate governance system has also fulfilled most of the
recommendations as stated in MCCG. However, we appear to have a stronger Board of Directors and
sub-committees (i.e. Audit Committee, Compensation Committee and Nomination Committee)
compared to its competitors as the majority of its members consist of independent non-executive
directors.
5.2)
Earnings Management
Alexander, Britton and Jorissen (2007) and Deechow and Skinner (2000) has commented that
accounting standards such as the IFRS and the accounting method choices of a Company played a
role in earnings management although they are not desirable as the adjusted figures will mislead the
stakeholders with regards to the Companys actual economic performance. Walton and Aerts (2009)
and Lev (2003) added that the main reasons for managers to manipulate their accounts includes:- (i)
Personal Advantages; (ii) To attract perpetuation support of investors and suppliers; and (iii)
Fulfilling contractual agreements.
Based on our financial statements, it is questionable whether transactions have been manipulated. A
simple analysis of the above is available at Appendix 37.
Nevertheless, our Companys financial statements have been audited by KPMG Malaysia and the
audited reports had been evaluated as Unqualified.
It is therefore arguable that earnings
management in our Company is deemed to be mild and falls within the acceptable range under IFRS
and the relevant supporting documents were furnished to the auditors during the audit process.
Mulford and Comiskey (2002) has commented that earnings management that are deemed to be
conservative and acceptable are not necessarily harmful as it could be practiced to keep a Companys
net income at a sustainable level.
5.3)
Sustainability
Goodman and Redclift (1991) explained that sustainability is more than a new word for the
environment, and the inter-relatedness between both environmental and developmental issues in the
pursuit of sustainability.
Elliott and Elliott (2009) added that due to increasing social pressure,
companies nowadays are expected to act ethically, essentially in their relationships with stakeholders
that have a legitimate interest. This is contrary to the conventional Friedmans approach which
emphasize that companies should only be responsible on maximizing shareholders value (Elliott and
Elliott, 2009).
23
In addition, we have quantified the aspects of sustainability indicators by using the Input Output
Analysis concept of defining the costs of sustainability (Gray et al, 1993 and Nestl, 2013). A
summary of our Companys sustainability indicators of is appended in Figure 20.
Figure 20 Nestl's Sustainability Indicator
Based on the 2013 Performance Indicators, Nestl has provided a detailed explanation on each
indicator listed above and is enclosed in Appendix 40.
In short, our sustainability activities are among the paramount of the Companies in Malaysia and they
adhere to the Integrated Reporting requirements.
As such, this has brought upon several awards
including the Malaysian ACCA sustainability award in 2011 and The Prime Ministers Hibiscus
Award 2013 (Bernama Media, 2011 and Berita Micci, 2014).
6) CONCLUSION AND RECOMMENDATIONS

Subsequent to assessing our Companys performance from a quantitative and qualitative perspective,
it is concluded that our performance is generally encouraging. The following recommendations are
put forth for improvements:(a)
Raw Materials
Since the occurrence of the Ebola epidemic, the price of cocoa from our main supplier in
Africa has increased significantly. Other main raw material such as sugar and milk solids (due
to drought in NZ) has also been observed.
Based on the above, our Purchasing Department may consider alternative suppliers which
offer a lower price for similar quality raw materials. For instance, Listiyorini and Rusmana
(2014) has reported that an alternative exporter for cocoa, Indonesia offers a lower global
price for the said commodity (i.e. USD2,500 per tonne as opposed to global average price of
USD3,000 per tonne Appendix 35).
24
(b)
New Product Development

We would recommend to steer new product development activities in relation to observable
market trends in the aging population growth coupled with increased discretionary income
spending. Nutraceutical products are food products providing health and medical benefits,
which includes prevention and possibly treatment of diseases is a segment which would augur
well in this line.
(c)
Expansion of Integrated Agricultural Support for Local Farmers

To expand current CSR projects into other potential local raw materials (eg. Incorporating
local fruits into confectionery and beverages products). This is in order to capitalize on
suppliers integration and improve operational efficiencies, while benefitting the society and
community as a whole.
(d)
Liquidity Position
For the fiscal year 2013, the company reported current assets of MYR929.99mn, compared to
current liabilities of MYR1071.86mn. Nestle also recorded receivables of MYR497.29mn.
The company's current ratio was 0.87 at the end of fiscal year 2013, as compared to 0.90 in
2012. It also recorded increased quick ratio and cash ratio of 0.49 and 0.01 as compared to
0.46 and 0.03 respectively in 2012. A negative current ratio indicates that the company is in a
weak financial position. The performance of the company depends largely on the cash
reserves and its ability to generate cash from operations. Lack of sufficient cash or cash
equivalents could hamper the operations of the company.
We must focus on optimizing our short term resources and reducing the working capital cycle
without disturbing day-to-day operations of the business.
(e)
Transparency
Generally, our corporate governance and sustainability activities are good but we would
encourage higher transparency in terms of the preparation of financial statements.
With the increasing awareness of transparency practices and the occurrence of many
accounting frauds globally, investors have become more risk averse. Higher transparency in
terms of proper justifications for transactions like related party loans and a more detailed
report of its expenses would be encouraged.
(f)
New Investment Big Data

25
Finally we recommend considering investments in Big Data solutions. SAS has defined big
data as the availability of structured and unstructured data to promote accurate analysis.
Goyal, Hancock and Hatami (2012) states that the above is expected to enhance immediate
feedback from customers and suppliers.
In the long run, it will also promote higher
transparency, hence better performance management, cross-functional collaboration and talent

management.
26
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Accounting and Finance

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6) Conclusion and Recommendations................................................................24

Table 1 SWOT Analysis................................................................................................ 9

2.2) The Industry Outlook

Figure 1 Nestl Operative Functions

Source: Nestl Malaysia Analyst Briefing 11 Nov 2013 s.9

Figure 3 Nestl Channel Sales

3.3) Industry Analysis

Figure 4 Porters 5-Forces for Nestl

3.4) SWOT Analysis

Table 1 SWOT Analysis

3.5) Future Prospects

4) QUANTITATIVE ANALYSIS (FINANCIAL RATIOS)

RETURN ON EQUITY RATIO

Figure 5 Return on Equity Ratio

GROSS OPERATING MARGIN

Figure 6 Gross Operating Margin

PROFIT MARGIN RATIO

Figure 7 Profit Margin Ratio

AVERAGE COLLECTION PERIOD

Figure 8 Average Collection Period

AVERAGE AGE OF PAYABLES

Figure 9 Average Age of Payables

AVERAGE NUMBER OF DAYS IN STOCK

Figure 10 Average Number of Days in Stock

TOTAL ASSETS RATIO

Figure 11 Total Assets Ratio

Figure 12 Current Ratio

Figure 13 Cash Ratio

4.4) Leverage Ratio

Figure 14 Debt to Equity Ratio

4.5) Comparison of Nestls performance vis--vis F&N and DL

Table 2 Comparison of Nestls performance vis--vis F&N and DL

INDEX NUMBER OF NESTLE

Figure 15 Index Number of Nestl

improvement in expenses in the near future.

Figure 16 Nestl's Governance of CSV, Sustainability and Compliance

Figure 18 Nestl Creating Shared Value Concept Components

Source: Nestl CSR Presentation

It concerns with the relationship and

It is therefore arguable that earnings

Figure 20 Nestl's Sustainability Indicator

As such, this has brought upon several awards

6) CONCLUSION AND RECOMMENDATIONS

New Product Development

Expansion of Integrated Agricultural Support for Local Farmers

New Investment Big Data

In the long run, it will also promote higher

transparency, hence better performance management, cross-functional collaboration and talent

Accounting Academics, Practioners and Regulators. American Accounting Association: Accounting

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