Fraser and Neave – Leveraging on milk May 11, 2017 780

PSR Recommendation: NEUTRAL Status: Upgraded
Target Price: 2.31
  • 1H FY17 Revenue/EBIT met our 47%/38% of our FY17 full year forecasts
  • Subdued top line growth as expected; Dairies continued to cushion the weak earnings from Beverages
  • Margins compression on the back of persistent challenging operating environment coupled, higher marketing expenses and increased debt burden
  • Additional stake in Vinamilk to 18.74%; investment will be accounted as associate and contribute to earnings in 2HFY17
  • Interim DPS of 1.5 Cents declared, same as last year

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.

  • Beverage: Weaker soft drink sales in core markets (SG and MY) coupled with higher raw materials costs and intensified marketing expenses in new markets (ID, MM, TH and VN) caused PBIT to collapse by 82.2% year-on-year (“yoy”) in 1HFY17. PBIT Margin -5.8 percentage points (“pp”) yoy to 1.40%.
  • Dairies: Higher turnover from TH offset weaker demand in MY. Favourable milk-based commodity cost widened PBIT Margin (+2.3pp yoy to 14.4%), resulting in PBIT +21% yoy in 1HFY17 albeit a flattish top line growth.
  • P&P: Persistent challenges as both Printing and Publishing businesses continued to see declining sales. Losses before interest and taxation doubled to -$7.9mn due to lower margins from a change in product mix in Education Publishing, investments made in its e-commerce project, and higher inventory provision.

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

  • Investment will be accounted as associate and contribute significantly to earnings. FNN further acquired c.1.2% shares in Vinamilk subsequent to end-FY16, taking the Group’s interest in Vinamilk to 18.7%. Vinamilk will only contribute to earnings in the 2HFY17.
  • Accounting for higher finance cost. The Group geared up with c.S$600mn bank loans to finance acquisition of shares in Vinamilk, resulting a net debt position of $97mn as at end-2QFY17 compared to a net cash position of S$166.2 million at end-1QFY17.

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%.

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About the author

Profile photo of Soh Lin Sin

Soh Lin Sin
Investment Analyst
Phillip Securities Research Pte Ltd

Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.

She graduated with a Bachelor of Science in Mathematics and Economics from NTU.

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