Earnings was affected by weaker consumer sentiment, adverse translation effects from a weak Ringgit (c.7% yoy as at end-Mar2017) and continued brand investment costs. Drag in revenue came from Malaysia Beverages and Dairies divisions, 1HFY17 sales -15% yoy and -8% yoy respectively. Dairies Thailand continued to provide strong support to Group’s earnings.
We reviewed this set of results on half-yearly basis to eliminate the impact arising from earlier Chinese New Year this year.
Maintained our view of (i) Subdued demand and competitive pricing in Malaysia in FY17; (ii) Margin erosion due to rising raw material costs partially mitigated by favourable milk-based commodity cost; and (iii) Higher marketing costs for New Markets penetration. Possible implementation of a sugar “sin tax” this year in Malaysia would further compress PBIT margin. Upside surprise could come from higher contributions from Beer and new vending business.
Change in valuation model to sum-of-parts on increased stakes in Vinamilk
Upgraded to “Neutral” rating with new sum-of-parts derived TP of S$2.31 (previously S$1.80)
FNN is currently trading at Trailing P/E of 33.7x, and our TP-implied FY17F P/E is at 31.5x, which are higher than its ASEAN Beverages peers at 18.1x and 18.5x respectively. While operating environment in Malaysia is expected to remain challenging, the additional stake in Vinamilk will allow FNN to reap greater streams of dividend income and increase its exposure to Vietnam. Thus, with a new TP, we upgraded our rating to “Neutral” as we wait for a bigger game changing catalysts.
Potential re-rating catalysts would be acquisition of additional stakes in Vinamilk and Saigon Alcohol Beer and Beverages Corporation (“SABECO”). On a separate note, there is no update for the acquisition of Penguin Random House Limited in Singapore and Malaysia. Successful acquisition of Penguin’s sales and distribution offices will immediately scale up FNN’s distribution channels.
We expect FNN to fund any acquisitions via borrowings and/or internally generated fund. Current net gearing ratio is at 3% and at 8.5% by end-FY17F, i.e. further headroom before hitting its ceiling of 80%.