F&N kept ‘neutral’ on untested colas


By MIDF Research

Neutral (maintained)

Target Price: RM17.52

WE attended a briefing session organised by Fraser & Neave Holdings Bhd (F&N) in relation to its second quarter results.

F&N recently launched its new carbonated cola flavoured drink My Cola in Sabah and Sarawak.

Following the ‘test-run’, management is now planning to launch the drink in Peninsula Malaysia.

My Cola will compete head on with its partner-turned-rival’s famous Coca-Cola amongst others, and management seems upbeat on the potential.

We believe that My Cola will fill at least some of the void left by Coca-Cola; however the extent to which it can successfully do so is still unclear at this point.

Management hinted at the possibility of the introduction of a second carbonated cola flavoured drink, Est Cola, to boost its soft drinks consumer base.

According to management, this is one of the potential synergies of being part of the TCC/Thai Beverage group.

If launched, F&N will effectively be tapping on TCC/Thai Beverage to boost its offerings of potentially cheaper carbonated cola flavoured drinks to woo consumers.

However, given that the success of both My Cola and Est Cola is not yet observable, we remain neutral in the meantime.

Dairies Thailand’s recent unseating of Dairies Malaysia as the second largest contributor to the group indicates that Dairies Thailand may show some good growth potential in the years ahead.

The segment accounted for 27.6% and 18.5% respectively of F&N’s revenue and operating profit in the first half of financial year ending Sept 30, 2013.

In mid-2013, F&N will be celebrating its 130th year since its establishment.

We expect that F&N will be leveraging on the event to build the recognition and loyalty for its brands as well as introduce new ones.

We expect F&N’s Seasons brand to be a potential focus in the various marketing initiatives given that management has indicated that some additions to the Seasons brand will be launched mid-year as well.

There is also the possibility of the introduction of the Japanese brand of drinks, Oishi.

Like Est Cola, the drink will likely be distributed by F&N for the larger TCC/Thai Beverage group.

Despite a 25.4% decline in first half 2013 earnings per share (EPS) to 30.8 sen, management has recommended to maintain the interim dividend amount at 20 sen per share in respect of financial year ending Sept 30, 2013.

In our opinion, the dividend recommendation, which is to be paid out to owners on Aug 1, 2013, signals management confidence that F&N will achieve full recovery in its soft drinks segment in the coming years.

Nevertheless we do not see that happening in financial year 2013/14.

We expect positive synergies from the TCC/Thai Beverage takeover to benefit F&N’s soft drinks segment and a likely expansion of the Dairies Thailand segment given the growing economy but anticipate a ‘gestation’ period of three to four years.

Until then we recommend a “neutral” stance at an unchanged target price of RM17.52.

The target price was arrived at by applying a price-to-earnings ratio (PER) of 25 times representing F&N’s 1.5-year historical average PER since the recovery of the Rojana dairies plant mid-2012.

Perisai Petroleum Teknologi Bhd

By Hwang-DBS Vickers Research

Buy (maintained)

Target price: RM1.50

PERISAI Petroleum Teknologi Bhd reported a first quarter ended March 31, 2013 net profit of RM23.7mil (-2% quarter-on-quarter, +2% year-on-year), which is 27% of our previous financial year ending Dec 31, 2013 forecast profit and 24% of consensus.

Revenue came in at RM49.1mil (flat quarter-on-quarter, +6% year-on-year) while earnings before interest and tax (EBIT) jumped 68% quarter-on-quarter (but dipped 3% year-on-year) to RM25.7mil due to one-off impairment charges booked in the fourth quarter of 2012.

EBIT margin remained strong at 57.4% (versus 62.4% in the first quarter of 2012).

Balance sheet remained healthy with 49% net gearing (versus 66% in the fourth quarter of 2012).

The proposed acquisition of a 51% stake in floating production storage and offloading (FPSO) Lewek Arunothai from EOC Ltd is likely to be completed by the third quarter of 2013 which is within our expectation as we have assumed only fourth quarter of 2013 contribution in our forecasts.

We are optimistic of the long-term prospects of the contract-backed FPSO as this is a significant acquisition to enhance Perisai’s earnings visibility.

We have raised 2013 to 2015 forecast earnings by 8%, 22%, and 41% respectively.

This was after we included contribution from its maiden jack-up rig, Perisai Pacific 101, which is scheduled for delivery in July 2014.

It was also partly due to lower interest expense, as FPSO Lewek Arunothai will be treated as a joint venture instead of subsidiary.

This will strip out the borrowings from its balance sheet.

We maintain “buy” on the stock.

We nudged up target price to RM1.50 after rolling forward our valuation base to 2014 and the earnings upgrade.

We continue to like Perisai for its strong earnings visibility.

This outlook is supported by long-term charters for its key assets, namely mobile offshore production units (MOPU) and FPSO.

A key re-rating catalyst would be Perisai securing a huge drilling contract to enhance earnings visibility.

The appointment of KCA DEUTAG as the rig contractor in November 2012 suggests that it may be on track to secure a drilling contract.

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