F&N Holdings
KUALA LUMPUR: CIMB Equities Research is retaining its Hold call on Fraser & Neave Holdings (F&N) while it has lifted the target price for end-2018 from RM25.35 to RM30.50.
It said on Wednesday it has increased its conservative long-term growth assumption to 3% (from 2.5%).
“At our new target price, F&N is valued at 27 times (+ two standard deviation of historical P/E). We think this is justified given its leadership position in the domestic market and strong brand name.
“We think that the group will continue to deliver healthy earnings growth given its prudent management and resilient earnings profile,” it said.
Commenting on the first quarter results ended Dec 31, 2017 (1QFY9/18), revenue slid 2% on-year to RM1.1bil but reported net profit declined by 16.1% on-year to RM106.8mil.
Stripping out non-core items (provision for inventories damaged by fire amounting to RM2.9mil and forex loss of RM1.4mil), 1Q18 core net profit fell by a smaller 12.7% to RM111.1mil.
“This met our and market’s expectations at 27% and 26% of full-year forecast. We expect the group to post a stronger 2Q on the back of Chinese New Year (CNY) selling activities,” it said.
F&N’s 1QFY9/18 core operating profit declined 16% year-on-year to RM119.2mil, dragged by both its F&B Malaysia and Thailand units which saw EBIT falling 39.8% and 3.1%, respectively.
The former was due to higher input costs and lower volumes, which were partly offset by operational cost savings and lower overheads while the latter was due to unfavourable milk-based and sugar input costs; though this was somewhat offset by higher selling volumes and lower spend on A&P.
Meanwhile, 1Q18 sales decline year-on-year was aggravated by weaker F&B Malaysia contribution (-7.2% year-on-year) due to: i) domestic market share loss for its soft drinks segment due to intense competition; ii) later timing of Chinese New Year celebrations for 2018 which falls in mid-Feb (vs. the end of Jan in 2017) and iii) vendors and retailers in certain parts of Peninsular Malaysia reduced purchases in expectation of floods. However, this was partially offset by strong double-digit growth in exports.
As for the group’s F&B Thailand unit, 1Q18 sales continued to grow healthily by 5.5% year-on-year to RM468.2m, mainly boosted by double-digit growth in exports to the Indochina region as well as the expansion of new distribution coverage for the aforementioned region.
Despite difficult domestic market conditions, effective branding and consumer trade campaigns helped to cushion the impact, as well as the group’s continuous innovations in new products and an increase in distribution network points.
“The group has successfully hedged its raw material requirements, especially for milk powder and forex, up until Sep 2018F. We note that the group hedges a substantial volume of its forex on required raw material procurements and only allows a small amount unhedged.
“Meanwhile, we understand that the group will only benefit from the lower sugar price starting 2Q18F as F&N purchased and locked in higher sugar prices last year,” said CIMB Research.
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