- We reaffirm our HOLD recommendation on Fraser & Neave Holdings (FNH), with an unchanged fair value of RM19.18/share, based on a sum-of-parts derived valuation.

- As part of the fuel subsidy rationalisation measures by the government, petrol prices had increased by 20sen for RON95 and 15sen for RON97 in early September. Diesel prices, on the other hand, inched up by 10sen.

- Despite the hike in petrol and diesel prices, the group reported that it will not increase beverage prices. The higher fuel price will be absorbed by FNH.

- This means that the higher costs will not be passed on to customers.

- As such, we opine that margins are likely to see some compression in FY14F, in light of FNH’s 27% share of the soft drinks market and its large distribution network across 90% of total retail outlets nationwide. Nevertheless, we only expect a minimal fuel price impact in FY13F, as the group’s fiscal year-end is in September.

- Our model assumes an EBITDA margin of ~10% for FY13F-FY16F. We maintain our assumption at this juncture, pending further details from management.

- Separately, FNH had entered into another three new markets, namely, Loas, Cambodia and Myanmar to market and distribute Thai Beverage’s Oishi Green Tea product. Recall that FNH had only recently started marketing and distributing the product in Malaysia.

- While we believe that cross-selling products with Thai Beverage is a positive move for FNH’s soft drinks business, we maintain our FY14F-FY16F earnings projection (RM217mil-RM243mil) for now, as we do not expect material earnings contribution at such an early stage.

- At the current level, the stock is trading at a forward FY14F PE of 29x, marginally above its 5-year historical peak of 28x.

Source: AmeSecurities