- We reaffirm our HOLD recommendation on Fraser & Neave Holdings (FNH), with a lower fair value of RM16.50/share (vs. RM19.18/share previously), based on a sum-of-parts valuation, as we roll forward our valuation to FY14F and update our WACC assumption.

- Post FY13 result revision, we expect normalised net profit to grow by c.5%-6% over FY14F-FY16F. Earnings from FY15F onwards incorporate development profits from its Section 13 project (50:50 JV), assuming that recognition is based on progress billings.

- While FY13’s top line was supported by growth at Diaries Thailand (post-flood recovery) and its soft drinks division, FNH is still trading at rich valuations of 30x FY14F PE. We prefer Berjaya Food (FV: RM2.30/share) for its cheaper valuations underpinned by robust earnings growth.

- The group maintained its share of 27% of the domestic ready-to drink market. However, FNH has yet to regain its past volumes with Coca-cola (short by c.11%) despite the current encouraging volume growth trajectory.

- Nevertheless, FNH is poised to leverage on more synergies with TCC Group to boost its soft drink division. As it is, FNH is already the marketing and distribution partner for Oishi and enjoys cost savings through joint-procurement of packaging from Tetra Pack.

- The relocation of Diaries Malaysia’s plant to the Pulau Indah Halal hub would enable FNH to further penetrate the Halal export market. FNH’s currently has presence in the Halal markets of Africa and Middle East. Given the challenging domestic market, FNH targets to double its exports footprint over the next five years, in line with its increased capacity of 30%. Overseas sales currently constitute 15% of Diaries Malaysia sales.

- There is no impact from the reduction in sugar subsidies as FNH purchases sugar at zero subsidies. In fact, this should ease price competition between the condensed milk players.

- Diaries Thailand made a remarkable post-flood turnaround with a 39% volume growth in FY13. However, such a strong growth is not expected to persist. FNH expects operations to grow by a double-digit, buoyed by its market leader position in the evaporated and condensed milk categories, with c.60% and c.30% market share respectively, in Thailand.

- Master plan for the Section 13 integrated property development (GDV: RM1.8bil) has been approved. The residential component (GDV: RM571mil) is planned for launch in 4QFY14F.

- The stock is trading at a forward PE of 30x, above its 5-year historical peak of 28x.

Source: AmeSecurities