Kenanga Research has cut its earnings forecast for F&N next year by 2% to account for depreciation and operating costs associated with the dairy farm.
PETALING JAYA: Fraser & Neave Holdings Bhd
’s (F&N) long awaited upstream fresh milk business in Agri Valley, Negri Sembilan, will soon materialise with the recent successful arrival of 2,500 Holstein heifers from Chile, say analysts.
The arrival marks a key turning point in the group’s RM3bil integrated-dairy venture, after a setback in October last year when Malaysia’s Veterinary Services Department revoked its import permit for a planned shipment of top-tier US-bred dairy heifers due to biosecurity concerns.
“While short-term earnings will take a modest hit from initial costs especially with higher depreciation, we see this as a strategic step, enhancing F&N’s longer-term growth prospects in the dairy industry,” Kenanga Research said in a report.
With the issues from earlier delays clearing up, the research house expects first milk production to start by the middle of this year.
According to F&N, the Chilean cattle are fully genomically tested with Genomic Total Performance Index (GTPI) standards on par with the originally planned US imports, which management previously guided to have GTPI over 2,500 and the potential to yield up to 40 litres of milk per day.
The cattle are currently under quarantine at F&N’s on-site, climate-controlled facilities.
Kenanga Research, which reiterated an “outperform” call on the stock, however, has cut its earnings forecast for F&N next year by 2% to account for depreciation and operating costs associated with the dairy farm.
The research house also raised its target price on the stock by 5% to RM29.80 per share from RM28.50 previously.
“We continue to like F&N for its earnings defensiveness, given the stable demand for essential food items despite high inflation and an uncertain global economic outlook,” it said.
The research house said there is also rising popularity of ready-to-drink products, where F&N has a strong presence.
Kenanga Research said that the company is also a proxy to the recovery of domestic consumption and the return of tourists to Thailand, with its long-term growth prospects driven by its investment in the sizeable dairy farm in Gemas, Negri Sembilan.
The risks to its call include an uptick in food commodity prices, sustained high inflation eating into consumer spending and consumers opting for more affordable alternatives, the research house said.
Meanwhile, MIDF Research said the successful arrival of the Chilean herd underscores F&N’s commitment to raising the bar for fresh-milk production and securing long-term food security for Malaysia.
It pointed out that the integrated dairy farm in Gemas is central to F&N’s broader goal of transforming from a beverage manufacturer into a vertically integrated dairy player.
Even though the AgriValley project will take time to scale up, its long-term implications for brand equity, and import substitution are substantial, the research house said.
MIDF Research has maintained its earnings forecasts for the company for this year and next for now, pending first production of milk and commercial output from AgriValley.
“We will also take this opportunity to revise our valuation peg to reflect the latest three-year mean price-earnings ratio of 20 times from 22.5 times, in line with recent market re-rating trends,” the research house added.
Based on this, MIDF Research has its lowered target price for F&N to RM32.68 a share from RM36.77, based on unchanged earnings forecasts for this year.
“We remain optimistic on F&N’s prospects, underpinned by its strong earnings, defensiveness and resilient consumer base,” said the research house.
It noted that demand for essential food and beverage products remains stable despite inflationary pressures and global macroeconomic uncertainty, reinforcing F&N’s position as a dependable consumer staple.
The group also continues to benefit from the growing popularity of ready-to-drink beverages, where it maintains a strong market presence, as well as a rebound in tourism across both Malaysia and Thailand, supporting out-of-home consumption trends.
“Over the longer term, growth will be driven by the group’s investment in its integrated dairy farm in Gemas, which positions F&N to enhance supply chain resilience and tap into Malaysia’s underserved fresh-milk segment,” added MIDF Research.
