Fraser & Neave Holdings Bhd
(Nov 6, RM35.30)
Maintain neutral with a lower target price (TP) of RM31.59: Fraser & Neave Holdings Bhd’s normalised earnings for the fourth quarter of financial year 2019 (4QFY19) came in lower by 3.3% year-on-year (y-o-y) to RM71.5 million. Cumulatively, FY19 normalised earnings were registered at RM406.2 million (6% y-o-y), lower than our and consensus expectations, accounting for 91.3% and 94.1% of full-year FY19 earnings forecasts respectively. Contrary to our expectations, the food and beverages (F&B) Thailand segment reported a decline in operating profit during the quarter, driven by intense competition in the sterilised milk segment.
The F&B Malaysia segment’s operating profit for 4QFY19 declined by 27% y-o-y to RM27.7 million. The subdued performance was mainly due to : i) retailers adopting a wait-and-see stance following the preloading of products in the previous quarter ahead of the sugar tax implementation on July 1, 2019; ii) expenses related to employee separation benefits and equipment written off and; iii) an absence of sales tax refund received in the corresponding quarter last year.
Meanwhile, F&B Thailand registered a decline in 4QFY19 sales by 0.8% y-o-y in local currency terms due to higher competition in the sterilised milk products. However, thanks to a favourable Malaysian ringgit versus the Thai baht foreign exchange translation, revenue for the segment rose 7.7% y-o-y. Nonetheless, its operating profit was lower by 1.8% y-o-y in view of the higher brand investment and trade spending for new product launches.
A final dividend of 33 sen per share for FY19 (versus FY18’s 30.5 sen) was declared. Cumulatively, the dividend for FY19 was 60 sen per share (versus FY18’s 57.5 sen).
We revise our TP to RM31.59 (previously RM33.78) based on FY20F (forecast) earnings per share of 121.5 sen to an unchanged price-earnings ratio of 26 times, a five-year historical average.
The outlook for F&B Malaysia remains challenging in view of competitive price pressures and intensifying competition, especially in the canned milk and beverage segments. Nonetheless, we believe that the group’s earnings will continue to grow, driven by better prospects from F&B Thailand, following the improvement in both sweetened condensed and evaporated milk segments. We believe the segment has plenty of room for advancement given the huge market. Furthermore, the management’s effort to continue investing in brand investment and trade spending for new products will solidify its brand presence. All things considered, we maintain our “neutral” call on the stock. — MIDF Research, Nov 6