This article first appeared in The Edge Financial Daily on February 5, 2020
Fraser & Neave Holdings Bhd
(Feb 4, RM32.94)
Maintain hold with a lower target price (TP) of RM31.30: Fraser & Neave Holdings Bhd’s (F&N) first quarter ended Dec 31, 2019 (1QFY20) revenue rose 10% year-on-year (y-o-y), while net profit grew 4.5% y-o-y to RM128.4 million. Excluding one-off losses of RM3 million (foreign exchange losses and write-offs of inventories), 1QFY20 core net profit rose to RM131.3 million (+10% y-o-y), further aided by a higher associate contribution of RM1.7 million (1QFY19: RM400,000). We deem this in line at 31.8% of our and 30% of the Bloomberg consensus full-year expectations. Note that 1Q is a seasonally stronger quarter due to various year-end festivities and the Chinese New Year (CNY) also fell earlier in 2020. As expected, no dividend was declared for the quarter.
F&N’s Malaysian operations (F&N Malaysia) recorded a 5.7% y-o-y growth in 1QFY20 revenue due to: i) the earlier timing of the CNY; ii) higher export sales; and iii) the launch of new products. Yet, F&N Malaysia’s operating profit declined 7.2% y-o-y due to: i) higher marketing costs due to the festive period and new product launches; ii) increases in raw material prices; and iii) a spike in operational costs.
F&N Thailand’s revenue rose 15.2% y-o-y (+6.1% in baht terms), thanks to a favourable ringgit versus baht exchange rate and strong domestic sales. Despite also incurring higher marketing charges for new product launches, F&N Thailand’s operating profit rose by 11.7% y-o-y (+2.9% in baht terms), mainly thanks to favourable input costs.
Year to date, raw material prices such as those of skimmed milk, sugar and palm oil have trended higher by an average 10% to 20%. Hence, we expect F&N to record weaker margins despite its ongoing cost management activities and active hedging policies. This is coupled with our view that F&N should record slower sales for the quarters ahead due to weak consumer sentiment and concerns over the Wuhan virus outbreak. Note that these have been factored into the 1.5% y-o-y decline in our FY20 net profit forecast.
With the results in line, we make no changes to our FY20 to FY22 earnings per share estimates. However, we lower our discounted cash flow-based TP to RM31.30 as we lower our risk-free rate assumption from 3.6% to 3.2% to reflect the latest 10-year Malaysian Government Securities’ bond yield. While we like F&N for the defensive nature of its business, we believe that it is fairly valued at 27.6 times calendar year 2020 price-earnings ratio (PER) (+1 standard deviation of its five-year mean PER) with no short-term rerating catalyst. Key upside/downside risks include higher-than-expected rises/drops in raw material prices (such of those of milk powder and sugar). — CGS-CIMB Research, Feb 3