This article first appeared in The Edge Financial Daily on August 7, 2017

Fraser & Neave Holdings Bhd
(Aug 4, RM24.74)
Maintain hold call with an unchanged target price (TP) of RM23.20: Fraser & Neave Holdings Bhd’s (F&N) third quarter of financial year 2017 (3QFY17) revenue declined 6.1% year-on-year (y-o-y) to RM1 billion, while core net profit slid 15.8% y-o-y to RM80.2 million. This brought nine-month (9MFY17) core net profit to RM313.8 million (stripping out foreign exchange losses of RM10.1 million), which was within expectations, at 81% of our and 78% of the consensus full-year forecasts. We deem this in line as 4Q is usually the weakest quarter of the year due to a lack of seasonal festivities. As expected, no dividend was declared for 3QFY17. 

F&N’s F&B Thailand unit experienced a revenue growth of 6.9% y-o-y to RM448.6 million, despite lower sales volumes as a favourable ringgit/Thai baht rate and higher export-boosted revenue. However, this was offset by softer showing of its Malaysian business that saw revenue drop by 14% y-o-y to RM592.5 million due to lacklustre sales during the Hari Raya festive season (weak consumer sentiment), compounded by intense pricing competition in the soft drinks segment. 

Its 9MFY17 earnings before interest and tax (Ebit) dropped 8.5% y-o-y to RM335.9 million. F&B Malaysia saw its 9MFY17 Ebit plunge 61.3% y-o-y due to an increase in raw material costs (particularly for sugar) and higher restructuring costs. The group’s F&B Thailand unit also saw its Ebit fall by 2.4% y-o-y to RM52.8 million for 9MFY17, due to higher raw material costs, partly mitigated by cautious and lower trade spending. Overall, F&N’s 3QFY17 Ebit margin declined by 2.2% percentage points y-o-y to 7.9%.

Exports now make up more than 10% of F&N’s total revenue, and the company has identified exports as the group’s main sales growth driver for the next few years. F&N targets to lift export sales to RM800 million by calendar year 2020 (CY20), but we think that it could easily achieve the goal before this. One of the key growth drivers of export sales would be F&N leveraging on its halal status to gain orders from the Middle East market, which would enable the group to expand its export distribution network.

We make no changes to our FY17 to FY19 earnings per share forecasts. We maintain our “hold” call with an unchanged discounted cash flow-based TP of RM23.20. The stock now trades at 21 times CY18 forecast price-earnings ratio, broadly in line with its historical five-year mean. We think that this is justified, given the group’s strong brand name, market leadership position in the domestic ready-to-drink market and good historical earnings track record. Key upside/downside risks to our call are significant decreases/increases in key raw material prices. — CIMB Research, Aug 4