- We reaffirm our HOLD recommendation on Fraser & Neave Holdings (FNH), with an unchanged fair value of RM16.50/share, based on a sum-of-parts valuation.

- FNH posted a 1QFY14 net profit of RM69mil, accounting for 30% of our and 28% of consensus full-year forecasts. 1QFY14 results is deemed in line with expectations given the stronger sales from an early Chinese New Year festive promotional program for the soft drinks division, which accounts for the bulk of its operating profit at 51% vs. 45% in 4QFY13.

- We expect a softer 2Q in view of the lack of major festive season and consumer spending moderation resulting from the government’s rationalisation programme.

- Overall, the group’s operating profit improved by 27% YoY, on the back of 11% YoY stronger sales. This is driven by stronger performance in all divisions.

- Soft drinks’ operating profit rose by 19% YoY and 73% QoQ due to higher volume, favourable product mix and commodity prices.

- Stripping the one-off items, Diaries Malaysia’s operating profit grew by 6% YoY, driven by higher volume, better trade management and realised cost improvement initiatives at the Pulau Indah operations. However, on a QoQ basis, operating profit slid by 15% resulting from higher advertising and promotion cost in 1Q.

- Dairies Thailand performed better due to higher volume and reduced advertising and promotion costs.

- All in all, our EPS estimates remain unchanged. Key risks to our earnings forecast are:- (1) slowdown in consumer spending for discretionary items, particularly for soft drinks; (2) rising operating cost, i.e. fuel subsidy reduction and electricity tariff hike; (3) volatile milk price; (4) weakening Ringgit and Thai Baht; and (4) political turmoil in Thailand.

- At the current level, the stock is trading at FY14F PE of 30x, above its 5-year historical peak of 28x. 

Source: AmeSecurities