This article first appeared in The Edge Financial Daily on October 15, 2019

Fraser & Neave Holdings Bhd
(Oct 14, RM34.46)
Maintain market perform with an unchanged target price of RM36.60: Fraser & Neave Holdings Bhd (F&N) had earlier entered into a conditional agreement with MSM Malaysia Holdings Bhd to acquire the approximately 4,453.92ha Ladang Chuping in Perlis for a cash consideration of RM156 million. Last Friday, F&N elaborated that the land would be utilised for its upstream insourcing of fresh milk with an estimated financial commitment of RM650 million, inclusive of land purchase and clearance costs for Phase 1.

For the first phase, 4,000 milking cows will be imported, yielding a potential output of 40 million litres of fresh milk a year with subsequent phases to take place upon stabilising the first. The parcel can host up to 20,000 milking cows, yielding a potential output of 200 million litres of fresh milk a year.

The land acquisition is anticipated to be completed in 2020, with the upstream milk insourcing commencement earmarked within 24 months after the land acquisition. Hence, we view this poses a minimal impact on the group’s sales and earnings in the immediate term. Additionally, as the group would still be in a comfortable net cash position after the acquisition, we do not anticipate any meaningful upticks to interest expenses. Moreover, assuming a 10% depreciation per year, the incremental depreciation rate from the new parcel would only marginally dampen our financial year 2020 estimated earnings by 1% to 2%, which we find immaterial.

For the longer term, we are positive about F&N’s upstream fresh milk venture. This should ease the group’s dependency on milk imports and partially shield it from drastic fluctuations in dairy prices and foreign exchange. All in, this should give the group a firmer grasp on its fresh milk manufacturing margins. It will better complement its existing downstream production and distribution of fresh milk, and the added capabilities would also boost its competitive strength against peers.

Nonetheless, we reiterate our view that this new venture is a booster for F&N’s longer-term prospects. As such, we have ruled out any earnings-accretive developments over the next two years. — Kenanga Research, Oct 14