This article first appeared in The Edge Financial Daily on February 8, 2018

Fraser & Neave Holdings Bhd
(Feb 7, RM29.90)
Maintain hold with a higher target price (TP) of RM30.50: Fraser & Neave Holdings Bhd’s (F&N) revenue for its first quarter of financial year 2018 (1QFY18) ended Dec 31, 2017 slid 2% year-on-year (y-o-y) to RM1.1 billion but reported net profit declined by 16.1% y-o-y to RM106.8 million. Stripping out non-core items (provision for inventories damaged by fire amounting to RM2.9 million and foreign exchange [forex] loss of RM1.4 million), 1QFY18 core net profit fell by 12.7% to RM111.1 million. This met our and market’s expectations at 27% and 26% of full-year forecasts, respectively. As usual, no dividend was declared. We expect the group to post stronger results for 2QFY18 on the back of Chinese New Year selling activities.

Higher input costs were a major drag on 1QFY18 earnings before interest and tax (Ebit). F&N’s 1QFY18 core operating profit declined 16% y-o-y to RM119.2 million, dragged by both its Malaysian and Thai food and beverage (F&B) units, which saw Ebit fall 39.8% and 3.1%, respectively. The former was due to higher input costs and lower volumes, which were partly offset by operational cost savings and lower overheads while the latter was due to unfavourable milk-based and sugar input costs; though this was somewhat offset by higher selling volumes and lower spending on advertising and promotions.

The group has successfully hedged its raw-material requirements, especially for milk powder and forex, up until September 2018. We note that the group hedges a substantial volume of its forex on required raw-material procurements and only allows a small amount unhedged. Meanwhile, we understand that the group will only benefit from the lower sugar price starting 2QFY18 as F&N purchased and locked in higher sugar prices last year.

We maintain “hold” recommendation and lift TP to RM30.50. While we make no changes to our FY18 earnings per share estimates, we are increasing our discounted cash flow-based TP to RM30.50 as we increase our conservative long-term growth assumption to 3% (from 2.5%). At our new TP, F&N is valued at 27 times (+2 standard deviation of historical price-earnings ratio). We think this is justified given its leadership position in the domestic market and strong brand name. We think that the group will continue to deliver healthy earnings growth given its prudent management and resilient earnings profile. — CIMB Investment Bank Bhd, Feb 6