Impact of GST on F&N expected to be minimal

-A +A

THE OVERARCHING ISSUE of how the Goods and Services Tax (GST) will affect spending habits next year has created uncertainties for companies, especially in the consumer goods space. However, for beverage manufacturer Fraser & Neave Holdings Bhd, the impact could be minimal.

“Our products are not on the GST-exempt list of items. Hence, the industry will be impacted by the tax. While the quantum has yet to be determined, we see the costs being passed down the value chain, especially as we do not determine the final price of the product.

“While we will try to manage our costs as much as possible, the ultimate selling price will be determined at the distributor and retail end of the value chain,” says the company in an email reply to questions from The Edge.  

Analysts believe F&N will not be severely affected by GST implementation because its products are relatively cheap, which means consumers need not skimp on them. Also, its leading position in the condensed and evaporated milk segment and among some soft drink brands could help ease the impact, they add.

“I don’t think F&N will be severely impacted by GST as stall operators will still need its milk products for their drinks and these aren’t expensive,” says CIMB Research analyst Eing Kar Mei.

An analyst at TA Securities believes F&N will see a decline in selling volume but adds that things will be no different for its competitors.

Currently, F&N is the market leader in Malaysia for condensed and evaporated milk, as well as its soft drinks 100Plus, Season Tea and NutriSoy. It is also the most popular brand of condensed and evaporated milk in Thailand.

Next year, F&N will be brewing TTC Group’s Oishi Green Tea — the No 1 tea brand in Thailand — and Est Cola locally. The latter, which will replace F&N’s MyCola, is the third largest cola brand in Thailand.

TTC Group, the unlisted entity of Thai billionaire Charoen Sirivadhanabhakdi that controls listed Thai Beverage PCL, came into the picture after it acquired more than 50% of Singapore-listed Fraser and Neave Ltd — the largest shareholder of F&N with a 55.61% stake.  

In a recent report, TA Securities says brewing the two beverages here could translate into better margins for F&N. However, Eing believes the contribution from the new products will initially be negligible.

Note that F&N’s shares have shed 7.23% over the last six months. The stock fell 7.76% — the steepest drop in two years — from RM17 on Oct 10 to RM15.68, a two-year low, on Oct 16. 

Analysts are unable to explain the decline as they see no negative events that could have sparked it other than market jitters from Oct 8 to 16 when world indices plunged.

Nevertheless, the stock had rebounded to RM16.68 last Wednesday, leading analysts to opine that now is a good time to look at it again. Based on Bloomberg data, there are three “buy” and two “hold” calls on F&N with target prices ranging from RM15.40 to RM24.52.

At RM16.68, the company traded at forward price earnings of 20.54 times.

Perhaps, what investors could look forward to is the company’s integrated development in Section 13, Petaling Jaya, which consists of residential units, a mall, small offices/home offices, a hotel and corporate offices. The 12.72-acre project has an estimated gross development value of RM1.7 billion.

F&N and its 50:50 partner in the project, FCL Centrepoint Ltd, will launch the residential component in April next year. The residences are expected to be completed within 36 months of the launch while the whole project will be finished in six years. F&N would not share any information on the pricing and plot ratio of the project.

Eing says the development is positive for the company, although she also points out that earnings from it will only be recognised in 2018 as the company is adopting a “completion method” of accounting. It seems confident that it has the right value proposition for buyers despite the weak sentiment in the property market.  

“We are confident of the response to our offering, given the proposition that we will unveil in due course, the expertise and track record of our team, the product offering, location and pricing,” it says.

F&N’s net profit for its financial year ended Sept 30, 2014 (FY2014) grew 21% from a year earlier — if an extraordinary income of RM45 million received in FY2013 as insurance claim on the floods that affected its Thai operations were excluded. Otherwise, net profit would have been flat at RM259.43 million compared with RM259.49 million previously. Revenue rose 8.9% to RM3.8 billion from a year ago.

The company’s Thai dairy business (Dairies Thailand) saw a 1.5% contraction in profit before tax because of higher milk cost that it was unable to pass on, though revenue was up 5.6%. The unit contributed about 25% to F&N’s operating profit for FY2014.

Dairies Malaysia contributed 22.3% to operating profit and saw revenue rise 7.9%. The soft drink division remained the largest profit contributor, at 51.8%, as revenue and PBT grew 4.5% and 26.2% respectively.

This article first appeared in The Edge Malaysia Weekly, on December 1 - 7, 2014.