F&N seen to remain leader in ready-to-drink, dairy segments

This article first appeared in The Edge Financial Daily, on January 25, 2019.
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Fraser & Neave Holdings Bhd
(Jan 24, RM34.54)
Maintain hold with an unchanged target price (TP) of RM36.90:
Fraser & Neave Holdings Bhd (F&N) announced that it had allocated RM30 million capital expenditure (capex) in FY19 to accelerate its plans to develop a more tasty and healthy range of products in tandem with its promise of “Pure Enjoyment, Pure Goodness”.

This capex amount also includes plans to add more production lines and add-ons to expand its production capabilities and capacity in a bid to increase both its product offerings as well as packaging formats.

Overall, this news did not come as a surprise to us, given that the company had earlier guided in its FY18 briefing a plan to introduce lower-sugar content as an option for its existing drinks.

This will allow consumers to choose between lower-sugar and full-flavour variants. Besides that, F&N had also highlighted in its FY18 briefing that it is considering introducing more lower-sugar content drink choices.

The RM30 million capex that the company has allocated is also within expectations, as we have included annual capex assumptions of RM100 million for FY19 to forecast FY21 (FY21F).

To recap, F&N expects a large portion of its drink offerings to be affected by the implementation of a sugar tax (40 sen/litre for ready-to-drink beverages with sugar content >5g/100ml) from April 1, 2019.

However, it is also confident of being able to mitigate the impact. F&N said it believes the negative impact can be well-managed by switching to alternative sweeteners to replace sugar, introducing new healthier goods with lower-sugar content, and reformulating some of its existing products.

Recently, the group has shown a good track record by managing to introduce the 100Plus Reduced Sugar which has 4g of sugar per 100ml, compared to 6g/100ml for the normal 100Plus

According to the company, it had successfully reduced the sugar index (sugar amount in grammes per millilitre of beverage) of its drink portfolio by 34% as of 2018 (6.3g per 100ml in 2018) versus 2014 (9.5g per 100ml).

Overall, we make no changes to our earnings estimates. Our “hold” call and dicounted cash flow-based TP of RM36.90 are also retained, at 27.6 times CY20F price-to-earnings ratio (PER).

This is slightly below +1 standard deviation of its historical five-year mean PER, we think the stock is fairly valued with no key rerating catalysts in the short term.

In our view, valuations will continue to be supported by its leading position in the ready-to-drink and dairy segments in the consumer space.

Key upside/downside risks to our call are higher-than-expected decrease/increase in key raw material prices (that is milk powder and sugar prices). — CGSCIMB Research, Jan 23