F&N believes strong pricing competition may be dissipating

This article first appeared in The Edge Financial Daily, on May 3, 2019.
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Fraser & Neave Holdings Bhd
(May 2, RM34.80)
Maintain hold with a target price of RM35.10:
Post the release of its first half of financial year 2019 (1HFY19) results, Fraser & Neave Holdings (F&N) hosted a briefing chaired by group chief executive officer Lim Yew Hoe and chief financial officer Lai Kah Shen. Overall, there were no major surprises from the briefing, with discussions mainly centred on the group’s 1HFY19 results and business outlook.

Overall, 1HFY19 pre-tax profit growth of 33.3% year-on-year (y-o-y) was driven by stronger results from F&N Thailand (operating profit rose 45.6% y-o-y), thanks to capacity expansion, higher sales — especially during the Songkran period — and favourable raw material prices. Despite higher sales volume (2.9% y-o-y), F&N Malaysia recorded a 0.5% y-o-y decline in operating profit, due to higher raw material and packaging material prices, as well as stiff price competition in the canned milk segment.

In 2019, F&N is focused on growing sales of both beverages and milk-based products. The group believes the strong pricing competition, faced by the Malaysian beverage segment over the past few years, may be dissipating. It aims to launch more innovative beverage products and increase promotional activities. In the milk segment, F&N views Thailand, together with countries in Indochina such as Laos, as key markets. It will continue to launch more packaging variants to suit different lifestyle needs.

An estimated 90% of F&N beverage products will be impacted by the implementation of a sugar tax on sugar sweetened drinks from July 1, 2019. Besides reformulating about 70% of its existing beverage products to lower sugar content while improving taste, F&N will also reduce packaging size of certain beverages to maintain prices. The group will also focus on introducing healthy product categories, with RM30 million capital expenditure invested in its Shah Alam plant to increase beverage production capacity.

Overall, we believe the stock is fairly valued at current valuations of forward FY19F/20F price earnings (PE) of 30.5/29 times (above +1 standard deviation of its five-year mean PE). In our view, its premium valuations are justified by F&N’s market leadership position in Malaysia, resilient earnings profile and strong brand name. — CGSCIMB Research, April 30