This article first appeared in The Edge Financial Daily, on May 9, 2016.

Fraser & Neave Holdings Bhd
(May 6, RM22.24)
Maintain add with a higher target price of RM26.50: We attended Fraser & Neave Holdings Bhd’s (F&N) first half ended March 31, 2016 (1HFY16) results briefing hosted by chief executive officer Lim Yew Hoe and chief financial officer Soon Wing Chong. Approximately 25 analysts and fund managers attended the meeting. There were no major surprises. Notably, despite the loss of contributions from Red Bull, management seemed to remain optimistic about the group’s outlook as it continued to focus on growing its in-house energy drink Ranger as a replacement in the longer term. 

Management highlighted that the group’s food and beverage units in Malaysia and Thailand were still growing at high single-digit growth rates, and it expected this to sustain, particularly in Thailand. Excluding the loss of Redbull contributions, Malaysian sales expanded at a high single-digit growth rate (we estimated it at around 7% to 9%). Management continued to expect strong demand for F&N’s products as it continued to innovate and defend its market share. 

As for the group’s raw material price outlook, we gather that milk prices have declined by around 11% year to date and about 30% year-on-year. F&N revealed that it had fully hedged its raw material prices and foreign-exchange requirements until year-end. Note that the group hedges a considerable portion of its US dollars on its committed raw material purchases, only allowing for a small proportion unhedged. Thus, we believe that it will continue to reap the benefits of lower milk prices, and that its margins should remain stable even if the US dollar were to strengthen against the ringgit. 

Given the stronger-than-expected margin expansion on the back of lower input costs, we lift our FY16 forecast (FY16F) to FY18F earnings per share estimates by 5% to 6.6%. We continue to like F&N for its strong execution capabilities, which have allowed the company to grow in spite of the overall weaker consumer environment. The stock is currently trading at attractive valuations of 18 to 19 times FY16F to FY17F price-earnings ratio (PER), which are below its five-year historical mean PER of 22 times, on the back of a healthy three-year earnings compound annual growth rate of 18.6%. — CIMB Research, May 5