This article first appeared in The Edge Financial Daily, on November 5, 2015.

Fraser & Neave Holdings Bhd
(Nov 4, RM18)
Maintain sell with an unchanged target price (TP) of RM19.62: Fraser & Neave Holdings Bhd’s (F&N) financial year ended Sept 30, 2015 (FY15) net profit improved by 8% year-on-year (y-o-y) to RM280.1 million, driven by its dairies units (Diaries Malaysia and Dairies Thailand). The segment benefited from both higher sales (Malaysia: +3% y-o-y; Thailand: +17.7% y-o-y) and an improved margin (lower milk-based commodity cost).

Excluding the fair value loss from investment properties and the gain from foreign exchange, core net profit was slightly higher at RM282 million (+9% y-o-y). Operating profit also grew by 6.5% y-o-y to RM333.9 million, underpinned by improved margins from Dairies Malaysia (+2.5 percentage points y-o-y) and Dairies Thailand (+1.3 percentage points y-o-y).

However, the group’s blended average operating margin was flat y-o-y, as the margin expansion in the dairies units was offset by margin contraction in the soft drinks unit (-2.2 percentage points y-o-y to 8.4%). All in, the results came in below our estimate (93%) but within the consensus estimate (95%).

The board declared a final dividend of 35.5 sen per share for the quarter, bringing the total for the year to 57.5 sen per share. That is 2.5 sen per share higher compared to FY14 (55 sen). The group’s FY15 revenue improved by 6.3% y-o-y to RM4.1 billion, thanks to the dairies units. Dairies Malaysia and Thailand recorded an increase of 3% y-o-y and 17.7% y-o-y to RM1.1 billion and RM1.5 billion respectively.

However, revenue from the soft drink segment was flat, declining by 0.7% y-o-y to RM1.5 billion. This was due to the floods in the east coast of Peninsular Malaysia in the first quarter of calendar year 2015 negatively impacting demand, soft consumer sentiment post-goods and services tax implementation, low post-festival sales, higher trade discounts and loss of two-month modern trade sales of Red Bull (contract expired in September).

We make no changes to our earnings forecasts pending an analysts’ briefing later today. We believe weak consumer demand will intensify the pricing competition. Selling costs, especially advertising- and promotion-associated costs, are expected to surge. Nevertheless, new product launches together with cost-efficiency measures could help mitigate expectations of a tough operating environment ahead.  We maintain our TP at RM19.62 and our “sell” recommendation on F&N for now. We shall review our recommendation post-analysts’ briefing. — TA Securities, Nov 4