• FY16 Revenue/EBITDA missed our forecast by 0.6%/13.4%
• Double whammy from unfavourable macro backdrop and rising costs pressure
• New markets are still in nascent stage and no concrete acquisition plan yet
• FY16 dividend of 4.5 Cents per share, 10% lower than FY15’s

Results at a glance

Persistent macro headwinds in core markets weighing against revenue as expected. 6.7% year-on-year (“yoy”) decrease in FY16 Revenue was in line with our expectation 6.1% yoy slowdown. We expect subdued topline growth of 1% for FY17 on the back of cautious consumer spending in Singapore, Malaysia and Thailand, and in the absence of new growth driver.

FY16 10.8% Dairies EBIT margin is at risk. Management noted the increasing trend in sugar prices, due to global supply shortfall until at least 2017, could compress Malaysia Dairies margin (main sales driver is sweetened condensed milk). To recap, Malaysia increased its refined sugar price by c.38.9% in August 2016, and sugar comprises 20% to 25% of its total raw material costs. We think that Fraser and Neave, Ltd. (“FNN”) will refrain from passing on the increased costs to end-consumer amid a competitive pricing environment. Rising cost pressure, coupled with the marginal 1% yoy volume growth in FY16, reaffirmed our view that it is not sufficient to depend solely on Dairies to drive growth and profitability.

Still waiting for the potential re-rating catalyst. As cautioned in our earlier report, the two deals on Vinamilk and Saigon Alcohol Beer and Beverages Corporation (“SABECO”) are still on the table. Acquisitions remains the fastest way to tap into new market, but there is no concrete acquisition timeline yet.

Potentially lower dividend as FNN conserves capital for potential acquisitions. FFN has a dividend policy of up to 50% payout, but paid 60%/63% in FY16/FY15.  Management has guided on the possibility of paying a lower dividend than FY16’s 4.5 cents going forward, due to its considerations of near-term capital needs. FNN is in net cash position of S$906mn as at end-FY16 and the Group has set aside S$700mn of cash for business acquisitions.

Maintain “Reduce” rating with lower TP of S$1.70 (previously S$1.93), pegged to 11x FY17F EV/EBITDA multiple. We adjusted our FY17F Revenue growth and EBIT margins lower in view of the slower-than-expected sales and rising costs pressure amid competitive environment. This translates to 22.4%/9.6% lower FY17F EBITDA/Earnings compared to our previous forecasts. We remain cognizant of adverse FX movement which could erode earnings, i.e. stronger USD against SGD; and weaker MYR and THB against SGD.

Valuation

Peer Comparison

FNN currently trades at 29.6x FY17F PER, which is c.67% premium to its ASEAN peers’ 17.7x. We think that the premium valuation is not justifiable given the slower growth post MBL-sale and lack of significant growth catalyst.

It also has lower return-on-equity (ROE), as compared to its ASEAN peers.

These support our thesis of ‘Reduce’ rating.

Figure 1: