HISTORY repeated itself at Fraser & Neave Holdings Bhd (F&N) last week.

The contract of the group’s wholly-owned subsidiary, F&N Beverages Marketing Sdn Bhd, to exclusively distribute Red Bull energy drinks was not renewed, ending a five-year relationship.

This marks the second time in the last decade that the exclusive rights of F&N (fundamental: 2.10; valuation: 0.90) to distribute internationally recognised brands have not been renewed.

The first time was in 2009, when The Coca-Cola Co decided not to renew its agreement with F&N to bottle and distribute soft drinks Coca-Cola and Sprite — a key contributor to the group’s earnings — in Malaysia. The contract lapsed in 2011, ending a 75-year relationship with the US-based soft drink manufacturer.

Now, F&N’s Red Bull contract, which generated an estimated 5% of its profit, is also gone.

Surprisingly, the market did not respond to the news. F&N’s share price remained flattish after the announcement on March 27. Last Friday, the counter traded unchanged at RM18.20 per share.

“F&N Beverages and Allexcel agreed not to renew the term of the principal agreement as both parties are unable to reach an agreement on the changes in commercial terms,” F&N says in its announcement to Bursa Malaysia.

The company was awarded the contract to market, distribute and sell Red Bull energy drinks — Red Bull ® Less Sugar, 250ml Red Bull ® Gold in cans and 150ml Red Bull ® Bottle — in Malaysia in 2010. That represented all the Red Bull products available in the market at that juncture.

According to CIMB Research, F&N managed to double Red Bull’s sales volume within the five-year contract period — from two million cases in 2010 to four million.

“Based on our estimates, Red Bull, which has a 70% share of the energy drink market, could be contributing more than RM200 million to F&N’s revenue and more than 5% of F&N’s net profit as it commands good margins,” says the research house.

Using CIMB Research’s estimates, this would mean Red Bull energy drinks contributed about 5% to the group’s revenue based on its results for the financial year ended Sept 30, 2014 (FY2014).

F&N’s first year without Coca-Cola’s contribution saw its revenue decline to RM3.17 billion in FY2012 from RM3.82 billion in FY2011.

Net profit fell to RM272.6 million from RM383.1 million during the same period. That was also the year that F&N’s Thai operations were hit by flooding, causing a 200-day cessation of business in the group’s dairy product manufacturing there.

Coca-Cola’s contribution of RM544 million to F&N’s revenue was also significantly larger than Red Bull’s.

Nevertheless, analysts believe the latest development is only a temporary setback for the soft drink manufacturer. AmResearch highlights in its report that F&N enlarged its product portfolio with myCola and 100PLUS Edge after its separation from Coca-Cola. “Its soft drink sales volume has recovered to almost (Coca-Cola) pre-termination level,” says the research house.

Analysts also believe that the end of Red Bull’s contract means that F&N can shift its focus back to building its own brands and developing new products.

AmResearch opines that F&N and its new ultimate holding company, Thai Beverage PCL, will be able to achieve synergy that would help cushion the shortfall from the loss of Red Bull’s contribution. F&N currently distributes Thai Beverage’s Oshi drinks — Thailand’s best-selling tea brand — in Malaysia. It is said to be brewing Thai Beverage’s Oshi tea and Est Cola locally this year, which would improve its profit margins.

AmResearch expects more cross-selling with the group’s Thai parent going forward.

In FY2014, F&N’s soft drink division grew 3.5% domestically while its export volume expanded 22.7%, thanks to its 100PLUS and F&N Seasons range, says its 2014 annual report.

As it stands, F&N commands the largest share of the local isotonic drink market with its own brand — 100PLUS — dominating 80% of it. The company also claims that its F&N Seasons Ready-to-Drink Tea range and Nutrisoy range are the local market leaders.

F&N’s revenue has been recovering from a dip in FY2012. It made consecutive year-on-year gains, increasing from RM3.17 billion in FY2012 to RM3.82 billion in FY2014. However, net profit has been moving in the opposite direction, declining from RM272.6 million in FY2012 to RM259.4 million in FY2014.

In its first quarter ended Dec 31, 2014, revenue rose 9.3% from a year ago to RM1.036 billion while net profit inched up 1.7% to RM69.94 million.

The first-quarter earnings were propped up by the dairy division with sales improving 20.6% at Dairies Thailand and 9.4% at Dairies Malaysia. However, the soft drink division saw a marginal rise in sales due to the east coast floods and later commencement of Chinese New Year activities.

Over the last year, F&N’s share price has been trading between RM15.40 and RM19.12, and analysts covering the stock have target prices ranging from RM15.40 and RM23.33.

At RM18.20 per share, the stock has a price-earnings ratio of 25 times and according to the most optimistic target price of RM23.33 by CIMB Research, it has an upside potential of 28.2%.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on April 6 - 12, 2015.

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