RAM reaffirms ratings of F&N Capital RM750m debt notes

F&N

KUALA LUMPUR: RAM Ratings has reaffirmed F&N Capital Sdn Bhd's RM750mil debt notes as it expects Fraser & Neave Holdings Bhd to retain its dominant position in the food and beverage industry in Malaysia. 

The rating agency had on Tuesday reaffirmed the respective AA1(s)/Stable and P1(s) ratings of F&N Capital RM750mil MTN Programme (2013/2028) and RM750mil CP Programme (2013/2020). 

The debt facilities are backed by full, unconditional and irrevocable corporate guarantees from F&N Holdings. As such, the ratings reflect the credit profile of the group.

The reaffirmation of the ratings is based on the performance of F&N Holdings, which largely came within expectations. 

Kevin Lim, RAM’s head of consumer and industrial ratings said: “While the group’s market shares in most of its domestic product segments have been declining, it has managed to solidify its leadership in the Thai canned-milk segment.” 

In FY September 2017, F&N Holdings’ operating profit before depreciation, interest and tax (OPBDIT) shrank 4.8%. 

Its soft-drinks division was squeezed by intense competition and more costly inputs (especially sugar), although this had been partly offset by its stronger Thai operations. 

In 1H FY Sep 2018, the Group’s OPBDIT declined another 12.7% on-year, as its dairy operations were hit by more costly milk-based inputs. 

“Going forward, the more favourable operating landscape (amid consumers’ upbeat sentiment and stronger spending following the newly elected government’s measures to reduce the cost of living) is expected to counter higher input costs, leading to a slight recovery in fiscal 2018 and 2019,” he said. 

F&N Holdings has a strong financial profile, with net-cash or near-net-cash positions in the last five years. 

The group’s cashflow is strong, with an average funds from operations debt cover (FFODC) of around 1 time in the last five years. 

“We expect the Group to remain in a net-cash position while its FFODC stays above 1 time over the next two years,” Lim added. 

The ratings are also supported by F&N Holdings’ dominance in several beverage and dairy segments. 

Despite its reduced market share, F&N Holdings still leads the overall ready-to-drink (RTD) segment in Malaysia, accounting for 25.2% of this area in 1H FY September 2018 (FY September 2016: 27.9%). 

F&N Holdings has a diversified product range and enjoys some degree of geographical diversity (via its operations in Thailand and increasing exports).

The group’s soft drinks operations depend much on 100Plus, which generates close to half of the division’s sales volumes and almost all of its profit. 

On the other hand, the ratings are moderated by the competitive operating landscape. 

Intense competition within the Malaysian RTD market has affected the group’s market share. 

In carbonated soft drinks, F&N Holdings’ market share has declined for the fourth consecutive year, from 28.0% in FY September 2014 to 24.1% in 1H FY September 2018. 

Similarly, its share of the domestic sweetened condensed milk market also slipped from 59.0% to 52.4% over the same period. 

F&N Holdings’ credit profile is closely linked to that of its parent, F&N Ltd, given their very close relationship. 

F&N Ltd’s enhanced business profile is, however, moderated by its weaker financial profile. 

The additional stake in Vinamilk - acquired for over S$1bil - has significantly weakened F&N Ltd’s credit metrics and narrowed its rating headroom for additional leverage. 

“F&N Ltd could be used as one of the vehicles to accelerate the ambitious growth strategy of its key shareholders (i.e. Thai Charoen Corporation Group and Thai Beverage Public Company Ltd). 

“We caution that further large-scale acquisitions by F&N Ltd would exert pressure on its credit profile and, indirectly, the ratings of F&N Holdings,” Lim pointed out.