Stock Name: F&N
Company Name: FRASER & NEAVE HOLDINGS BHD
Research House: INTER PACIFIC

Fraser & Neave Holdings Bhd
(Sept 28, RM14.48)
Recommend neutral at RM14.70 with higher target price of RM14.90: We recommend 'neutral' on Fraser & Neave (F&N) based on FY2011's EPS of 80.7 sen with a PER of 18.5 times. We have adjusted our target price to RM14.90 (previously RM14.52). The potential drivers for F&N are: (i) equity ownership in Cocoaland Holdings Bhd (CHB); and (ii) sales and distribution of Red Bull, expected to fill the gap that will be created by Coke as Coca-Cola Company (CCC) is not extending its bottling and distribution agreement which will end on Sept 30, 2011, with F&N. The underpinning risks are: (i) rising raw material prices ' milk powder, sugar and aluminium; and (ii) the removal of government subsidies which could dampen consumer sentiment.

F&N's investment in Cocoaland is viewed positively. Its 23.08% stake in CHB, which it acquired for RM54.6 million (RM1.38 per share), will allow F&N to use the hot-filling facility it currently does not have. At the moment, CHB's capacity for hot-filling is 120 million bottles (one line) per year. Following the investment by F&N, it plans to step up its capacity to 360 million bottles per year by FY2012, with the opening of an additional three lines.

The synergy between F&N and CHB bodes well for both parties. While the latter will be able to capitalise on F&N's vast marketing and distribution strength, the former will benefit from CHB's know-how'' and its hot-filling capacity in polyethylene terephthalate (PET), used for bottling fruit/vegetable juices and tea products. F&N plans to launch 50 new products over the next 24 months, focusing on tea and fruit juices, capitalising on the increased production capacity of CHB's hot-filling lines.

Under the transition agreement with CCC, F&N is now free to launch new brands and products (except for cola and lemon & lime carbonates) for both the domestic and export markets. F&N was previously not allowed to export its own brand soft drink products in its agreement with CCC. The partnership with CHB will enable F&N to tap into CHB's export network, as 50% of CHB's products are exported.

The local juice industry is geared up for intensive competition driven by the rolling out of new brands and products by the current players, and the emergence of new players, taking advantage of the shift by local consumers to a healthier lifestyle. New products looking for a slice of the market pie include: (i) CCC's Minute Maid Pulpy (introduced June 2010); and (ii) F&N's Ambient Juices under the Fruit Tree brand'' (introduced August 2010). The market is currently dominated by C I Holdings' Tropicana (35%), Malaysia Milk's Marigold (30%), and F&N's Fruit Tree and Sunkist (13%).
F&N's equity interest in CHB marks its second partnership in FY2010. The first was with Red Bull in February. The popular Red Bull energy drink will complement its existing products and should bring in about 10% of F&N's beverage sales revenue. ' Inter-Pacific Research, Sept 28


This article appeared in The Edge Financial Daily, September 29, 2010.