F&N’s 1Q earnings within expectations

This article first appeared in The Edge Financial Daily, on February 7, 2019.
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Fraser & Neave Holdings Bhd
(Feb 4, RM34.04)
Maintain neutral with an adjusted target price (TP) of RM33.78:
Fraser & Neave Holdings Bhd’s (F&N) normalised earnings for the first quarter of financial year 2019 (1QFY19) came in higher by 15% at RM122.9 million. This accounted for about 28% of our and consensus full-year FY19 earnings forecasts. The strong quarterly earnings were within our expectations as historically, the group’s 1Q results have accounted for between 25% and 40% of the full year’s for the last three financial years.

F&B’s Malaysian segment’s normalised operating profit for 1QFY19 increased by 33.8% year-on-year (y-o-y) to RM154.1 million. Post-transformation exercise, the segment managed to record a third consecutive quarter of positive growth albeit at a moderating pace. The strong performance was mainly due to: i) earlier Chinese New Year festive sell-in for beverage products, coupled with lower discounts; and ii) favourable input cost for sugar, palm oil and dairy-based commodities. However, these were partly offset by higher packaging material cost.

Similarly, F&B’s Thailand normalised operating profit for 1QFY19 rose by 36.5% y-o-y to RM72.7 million. This was mainly driven by: i) higher export revenue from market expansion and execution of promotional campaigns in the Indo-China region, such as Cambodia and Laos; as well as ii) favourable raw material cost. Nonetheless, F&B’s Thailand segment has commenced paying corporate taxes starting this quarter as it has fully utilised the promotional tax incentive awarded by the Board of Investment of Thailand.

We have adjusted our TP to RM33.78 (from RM31.54) as we rolled forward our valuation base to forecasts for FY20, pegging its FY20 earnings per share estimate of 129.9 sen at an unchanged price-earnings ratio of 26 times, its five-year historical average.

Despite the challenging domestic market condition in view of competitive price pressures and intensifying competition, we believe the group’s earnings growth will continue to grow, driven by: i) continued strong export growth; and ii) improved cost efficiency as a result of cost-optimisation efforts. In addition, we expect that the impeding excise duty at 40 sen per litre on ready-to-drink beverages that contain sugar exceeding 5g per 100ml, starting from April 1, 2019, will have a minimal impact on F&N’s bottom line due to: i) a lower overall contribution of the soft drink segment to the group’s earnings; and ii) ongoing reformulation of the sugar content for most of its products to below 5% while maintaining the same taste. All things considered, we have maintained our “neutral” call on the stock. — MIDF Research, Feb 4