- We reaffirm our HOLD recommendation on Fraser & Neave Holdings (FNH), with a higher fair value of RM16.95/share (from RM16.50/share previously), based on a sum-of-parts valuation, following an earnings revision.

- FNH reported 3QFY14 net profit of RM60mil, bringing 9MFY14 earnings to RM197mil. The results were above our and consensus estimates, comprising 88% and 83% respectively.

- The discrepancy is due to the better-than-expected cumulative 9M margin, arising from margin improvement in the soft drinks division and Dairies Malaysia. The water rationing exercise and political turmoil in Thailand did not materially impact the group.

- No dividends were declared during the quarter. Total dividend declared to-date is 22 sen/share.

- 9MFY14 revenue rose by 9% to RM2.9bil, with all of its three business units reporting stronger sales, thanks to higher distribution points and trade presence. Dairies Malaysia revenue grew by 10% YoY, while soft drink sales were up by a modest 3.8% YoY.

- Despite achieving an impressive 16.5% YoY sales revenue increase, Dairies Thailand’s inability to raise selling price to pass on the higher cost of milk-based products to end customers dragged operating profit margin to 6.4% from 9MFY13’s 8.3%,

- Stripping off the one-off insurance claim in 9MFY13, earnings improved by 22%. This was driven by the soft drinks and Dairies Malaysia underpinned by better sales, lower trade discounts, favourable sales mix and improved production yields. This led to operating profit margin improvement for the soft drinks division by 1.2ppts and 2.4ppts for Dairies Malaysia, on a YoY basis.

- Compared to the 2QFY14, 3Q EBITDA margin was lower by 1.4ppts, due to higher milk-based commodity prices and a stronger US dollar.

- Taking all in, we have revised our FY14F-FY16F earnings estimate by 9% to incorporate better EBITDA margins assumption of 10.3% from 10% previously. FNH achieved EBITDA margin of 10.6% (+0.1ppt YoY) in the 9M. We expect 4Q to be the slowest, given the seasonal lull quarter. Key risk to our earnings forecast is higherthan-expected commodity prices.

- The stock is now trading at a forward PE of 25x. This is above its 5-year trend average of 19x.

Source: AmeSecurities