- 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 reported 2QFY14 net profit of RM68mil, bringing 1HFY14 earnings to RM137mil. We deemed the results to be in line with our and consensus estimates, making up 61% and 58%, respectively. This is given the seasonal strong 1H that is boosted by soft drinks sales due to the various festivities in 1Q.

- The group declared a single-tier interim dividend of 22.0sen/share. Its total DPS thus far is higher (+10%) when compared to 1HFY13’s 20.0sen/share.

- 1HFY14 revenue rose by 9.5% to RM1.9bil, with all of its three business units reporting stronger sales. Both Dairies Thailand and Dairies Malaysia grew by an impressive 19% and 10% YoY, respectively, while soft drink sales were up by a modest 2.4%.

- FNH’s EBIT grew by 25% YoY due to improvements at the soft drinks division and the turnaround of Dairies Malaysia.

- Soft drinks division’s EBIT margin improved by 1.2ppts thanks to improved sales mix, lower trade discounts, favourable commodity prices and improved factory yield. This is in spite of a modest revenue performance that was impacted by increased competition. Its key products, namely 100Plus, Season Tea, and Iced Mountain, continued to drive the soft drinks division’s growth.

- Stripping out a one-off cost incurred last year at Dairies Malaysia, which includes the debt recovery and absence of relocation costs to Pulau Indah, EBIT had risen by 25% due to higher sales volume and improved production yields. EBIT margin expanded to 7.4% from 1HFY13’s 6.1%.

- We gather that the EBIT margin compression of 1.1ppt to 6.7% faced by Dairies Thailand due to unfavourable commodity prices had reversed its impressive top line growth.

- Our FY14F-FY16F earnings estimate remains unchanged with growth rates of 5%-7%. We expect a softer 2H given the historical trend of a strong 1H. An analyst briefing will be held later this morning.

- Moving forward, we believe that FNH’s product mix should improve as we envisage more cross-selling within Thai Beverage.

- The stock is now trading at a forward PE of 30x. This is above its 5-year trend average of 19x and peak of 18x.

Source: AmeSecurities