KUALA LUMPUR (Nov 9): The retail price of sugar-sweetened beverages under Fraser & Neave Holdings Bhd's (F&N) stable are seen rising by between 10 sen and 60 sen with the introduction of the sugar tax effective April 1, 2019, said RAM Rating Services Bhd.
This is based on the existing prices of RM1.20 to RM3.40 for 250ml to 1.5-litre drinks and the assumption that the sugar tax is fully passed on, it added.
In a statement today, the local rating agency views the recently-announced excise duty on sweetened beverages as a negative development for F&N.
However, it does not expect it to have an immediate impact on the food and beverage group’s ratings.
"The razor-thin operating margins of F&N’s soft-drink business leave little room for it to absorb cost increases without affecting its profitability. As such, we expect its heftier costs to be mostly passed on to consumers through higher product prices," said RAM.
Under Budget 2019, a 40 sen tax per litre will be imposed on drinks containing more than five grams of sugar or sugar-based sweetener per 100 ml, as well as fruit and vegetable juices with sugar content of more than 12 grams per 100 ml.
"This will affect F&N’s soft-drink operations, which contribute almost 30% of the group’s revenue. Most of F&N’s wide array of beverages such as isotonic beverages, carbonated soft drinks, Asian soft drinks, tea, green tea, juice and water in the ready-to-drink market will be subject to the tax.
"This includes 100 Plus (regular variant), the largest sales and profit contributor in the group’s soft drink division," it noted.
Despite the fairly minimal quantum of price increases, RAM expects demand to be negatively affected in the near term amid consumers’ knee-jerk reaction.
"This will partly negate the impact from the generally more upbeat sentiment since the Pakatan Harapan government came into power in May.
"Over the longer term, we expect the growth of the ready-to-drink market to stay subdued and largely driven by sales of bottled water, in line with consumers’ increasing health awareness," it said.
RAM also pointed out that F&N’s soft-drink operations have been significantly affected by the competitive operating landscape, weak consumer sentiment and rising living costs in the last two years.
"The implementation of the sugar tax may exacerbate competition; big players such as The Coca-Cola Co possess deep pockets and
have launched aggressive campaigns to wrest market share in the last few years.
"Given this, we do not expect the operating performance of F&N’s soft-drink division to improve meaningfully anytime soon," it added.
Nevertheless, even with a further weakening of its soft-drink business, RAM expects F&N’s balance sheet and cashflow-protection metrics to remain strong, with a net-cash position and a funds from operations debt cover of close to 1 time.
"With this new development, we expect F&N to speed up its research and development efforts to reduce the sugar content in its beverages. In June, the group launched a lower-sugar variant of 100 Plus which falls outside the scope of the imminent sugar tax," said RAM.
F&N shares ended the morning session down 50 sen or 1.44% at RM34.28 today, with 121,600 shares done, bringing a market capitalisation of RM12.58 billion. The broader market was also down today as the US Federal Reserve offered no indication that it might slow the pace of its interest rate increases.