Analysts see product diversification, expansion from F&N by taking Cocoaland private

Analysts see product diversification, expansion from F&N by taking Cocoaland private
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KUALA LUMPUR (June 7): Analysts see product diversification and expansion from Fraser & Neave Holdings Bhd (F&N) by taking Cocoaland Holdings Bhd private.

MIDF Research has raised its target price (TP) for F&N to RM30.91 as the research house believes the privatisation of Cocoaland will be value-accretive to the company due to product diversification and expansion of its customer base for the overseas market.

“We maintain ‘buy’ with a revised TP of RM30.91 (previously RM30.03) as we roll over our valuation year to FY23 (the financial year ending Sept 30, 2023) based on an unchanged price-earnings ratio of 26 times pegged at earnings per share (EPS) of 118.9 sen. The PER is based on its five-year historical mean. The dividend yield is estimated at 2.78%. 

“Key downside risks include an unfavourable ringgit to Thai Baht translation, a stronger increase in raw material prices and disruption to the supply chain,” said MIDF in a note on Tuesday (June 7). 

Last Friday, F&N proposed to privatise its 27.66%-owned associate Cocoaland by buying the remaining shares at RM1.50 each. The remaining 72.34% represents 325.43 million Cocoaland shares that are not owned by F&N. 

The total consideration for the proposed privatisation is approximately RM488.15 million, which shall be satisfied via cash consideration and will be funded by bank borrowings.

“Nonetheless, we make no changes to our earnings forecasts at this juncture. We estimate that the proposed privatisation will not have a substantial material impact on the gearing ratio of the group,” said MIDF. 

Separately, CGS-CIMB Research said the deal was a surprise as the research firm believes F&N would focus on expanding its product portfolio towards goods with less sugar content.

“However, we do concur with F&N that this acquisition can fortify its plans to expand its halal packaged food segment (an earmarked growth pillar). We expect strong business synergies as F&N can widen its product portfolio and market Cocoaland's goods via its larger distribution network. 

“Based on our estimates, this acquisition could lift F&N’s CY23-24 (calendar years 2023 and 2024) EPS by 0.7%-2% assuming extra finance costs of RM22 million for CY23-24, Cocoaland's CY23/24 net profit of RM34.5 million/RM41.7 million (Bloomberg consensus forecasts), and completion of this deal by 4Q22 (the fourth quarter of 2022),” said CGS-CIMB. 

According to CGS-CIMB, it has yet to incorporate the potential earnings accretion into its estimates pending completion of the acquisition. 

CGS-CIMB, which retains its "add" call on F&N, lowered its TP to RM25.60 (from RM29.80) as the research house cut its FY22-24 EPS forecasts for F&N on higher input costs and a risk-free rate of 4.3% on higher government bond yields. 

“We still like F&N as a proxy for a recovery in hotel, restaurant and cafe (HORECA) sales (about 30% of FY19 sales), which should offset the higher input costs. It also trades at an attractive 17.1 times CY23 PER, at a 26.3% discount to its historical five-year mean of 23.2 times as well as a 54.4% discount to the overall consumer sector’s weighted average CY23 PER of 34.7 times,” it added. 

At the time of writing on Tuesday, F&N shares were trading down 34 sen or 1.7% at RM19.66, with some 80,400 shares changing hands. This valued the group at RM7.21 billion. Year to date, the stock has fallen 20.4% from RM24.70. 

Cocoaland — the fifth top gainer so far in the day — grew 13.28% or 17 sen to RM1.45, giving it a market capitalisation of RM663.52 million. The counter has jumped 42.16% since the beginning of this year. 

Read also:
F&N to privatise Cocoaland at RM1.50 a share

Surin Murugiah