This article first appeared in The Edge Financial Daily, on May 6, 2016.

Fraser & Neave Holdings Bhd
(May 5, RM22.18)
Upgrade to buy from neutral with target price (TP) of RM28.35: Fraser & Neave Holdings Bhd’s (F&N) second financial quarter ended Mar 31, 2016 (2QFY16), revenue increased 6.3% year-on-year  (y-o-y) to RM999.2 million. The increase in revenue was attributable to the higher sell-in of its core products stemming from well-executed Chinese New Year festivity-driven consumer and trade marketing programmes. The increase in revenue was mainly contributed by the domestic market, which increased 8.37%, as well as the Thai market, which increased 1.56%.

The group’s 2QFY16 earnings grew 28.5% y-o-y to RM90.6 million, outpacing revenue growth. The growth was attributable to the lower cost of sales by 0.4% y-o-y during the quarter coupled with a lower effective tax rate. Compared with 2QFY15, the effective tax rate fell by 2.7 percentage points (ppts) to 15.8%.

The operating profit margin in 2QFY16 expanded 1.7 ppts to 21.7%. This was mainly because of the lower cost of sales, which increased its gross profit margin by 4.3 ppts to 35.2%. However, operating profit margin was slightly offset by the y-o-y decline of 220.2% in other income and the y-o-y 20.1% increase in operating expenses. Subsequently, due to the lower effective tax rate, the profit after tax margin in 2QFY16 expanded 1.6 ppts to 9.1%.

We upgrade F&N to “buy” from “neutral” with an unchanged TP of RM28.35 per share. — MIDF Research, May 5