TA Sector Research

Author: sectoranalyst   |   Latest post: Thu, 14 Nov 2019, 4:21 PM


Fraser & Neave Holdings Bhd - Ride on Growth and Positive on Vertical Integration

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We are turning more positive on F&N considering its i) business direction for vertical integration, ii) remarkable growth led by F&B Thai, and iii) F&B Malaysia to mark its first revenue growth since 2015. We introduced a multi-stage growth into our DDM-model as we believe the vertical integration would be a strong catalyst in the medium-term (assume medium-term growth of 7% while terminal growth remains at 3%). Following the change in DDM valuation, we upgrade F&N to Buy with target price of RM42.00/share.

Vertical Integration: A Strong Catalyst in the Medium-Term

Corresponding to the proposed land acquisition announcement released on 8 Oct 2019, F&N revealed its intention to integrate vertically into upstream businesses, i.e. dairy cattle and crop farming. Moreover, the group also revealed its indicative financial commitment of c.RM650.0mn (inclusive of land purchase cost and clearance cost) for phase 1 which entails importing 4,000 milking cows (capable of producing 40mn litres of fresh milk). This is a part of its bigger plan of hosting 20,000 milking cows in the long run.

The land acquisition is expected to be completed by 2QCY20, after which F&N would begin commencing upstream milk insourcing within 24 months. We believe such vertical integration would be positive to F&N’s medium-term strategy as it would i) enable new income source from farming, ii) strengthen its value chain which could expand margin and profitability while also improve sustainability of supplies to its existing downstream production.

We find Vietnam Dairy Products JSC, an affiliate of F&N which is involved in farming, production and distribution of milk alongside dairy-related products, operates with a hefty GP margin of c.45%. Therefore, we believe the proposition of an improving profitability is likely to occur upon successful vertical integration given that F&N is currently operating at a lower GP margin of 29-31%.

Meanwhile, the purchase consideration for the proposed Ladang Chuping land (measuring in total c.4,453.92 hectares) is RM156.0mn. This is fair considering valuers’ appraised values ranging in between RM150.0mn and RM190.0mn.

Remarkable Growth Led by F&B Thai

The performance of F&B Thailand has improved substantially (9MFY19 revenue +12.5% YoY; 9MFYFY19 operating earnings +53.5% YoY) with both sweetened and condensed milk segment garnered greater consumer demands due to increased consumption. We believe such heightened growth momentum would be sustainable underpinned by the group’s dynamic effort in building its brand name and strengthening product portfolio alongside the popularisation of sweetened drink such as Thai Ice Tea. Besides, the strengthening of Thai Baht (THB) is believed to be a tailwind to F&B Thai (YTD USDTHB has declined by 6%).

F&B Malaysia has Stabilised

Although caught being less vibrant in comparison to F&B Thai, we find it soothing to see F&B Malaysia has finally marked a YoY revenue growth (9MFY19 revenue +1.1% YoY) after 3 consecutive years of declines. Recall that F&B Malaysia has experienced decline in revenue (ranging from -3% to -8%) during FY16-18. We understand that various efforts and strategies i.e. product innovation, refining routes to market and commercial strategies were being taken to endure through the competitive landscape in Malaysia.

Reference to the group’s key directions for its beverages segment, namely having original recipes in smaller pack size, reduced sugar recipes and portfolio transformation via innovation into healthy product categories. We find that consumers’ acceptability towards the new reduced sugar products may have gained stronger tractions than we initially expected. In fact, we now wonder is the excise tax a blessing in disguise to the group, for it accelerated F&N’s innovation that could be a key to defend its market position.


We incorporate the indicative financial commitment for upstream business into our model resulting in higher capex for the period FY20 and FY21. However, given it is still in its preliminary stage where the venture will only contribute materially in the medium term, we do not attribute any contribution from the venture within our forecast periods. Meanwhile we have also updated our THB rate given its persistence appreciation. As a result, our FY19/20/21 earnings are adjusted by +1.6/+4.2/+5.6%.


We incorporated a multi-stage growth into our model as we believe vertical integration would be a strong catalyst in the medium term (assume mediumterm growth of 7%, while terminal growth remains at 3%). Besides, we change our risk-free rate assumption (cutting Rf to 3.5% to be consistent with our inhouse forecast). Coupled with earnings changes, the DDM-derived target price for F&N is RM42.00/share. We upgrade our recommendation to Buy (from sell previously) to ride on the group’s steady growth.

Source: TA Research - 14 Oct 2019

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