• Reiterate Add call on F&N, with a higher GGM-based TP of RM31.70 (from RM28.30) post review of estimates following the 4QFY9/23 results briefing.

• We expect investments in dairy farm to temper the impact of better operating margins from price increases in 2022 and easing commodity prices.

• Valuations are undemanding at 19.2x FY24F core P/E vs. post-2010 mean of 24.2x. Our TP implies 22.5x FY24F P/E on lower FY24-26F ROEs.

Investing for the Future

We see Fraser & Neave Holding’s (F&N) investments in dairy farms as a calculated risk towards supporting longer-term revenue and profit growth. Management is targeting RM1.3bn in investments under the first phase, which, when completed, would see F&N produce 100m litres of milk p.a. from 10k heads of cattle. First milking is expected in early- 2025F, with a starting herd of 2,000 cattle capable of producing c.20m litres p.a. Assuming full capacity is achieved in FY28F, and a retail price of RM8/litre, we estimates its dairy business would have a RM800m revenue potential, equivalent to 16% of FY23 revenue. Management is aware of the risks involved in the dairy business and is relying on a team of consultants to mitigate these risks. With feed for cattle, i.e. corn, grown onsite, F&N is hoping to keep costs low. Meanwhile, it aims to use its “fresher” milk offering (as opposed to reconstituted milk, which still dominates the Malaysian dairy market) to establish a more premium position within the local milk market.

Focus on Volume Rather Than Margins in FY9/24F

Management made it clear during its 4QFY9/23 results briefing on 8 Nov that its focus in FY24F, especially for the Thai business (which contributed 43% of FY23 revenue), is to grow volume. To achieve this, it is willing to sacrifice 1-2% pts in operating margin, which hit 21% in 4QFY23. In Malaysia, despite media reports of weak consumer sentiment, management has noted a recovery in consumer demand of late. We believe the measures announced during the Malaysian Budget 2024 on 13 Oct, seeking to raise the quantum and frequency of handouts, would be supportive of consumer demand into 2024F; as such, we estimate a 5.5% yoy lift in FY24F revenue for its Malaysian business.

Reiterate Add, With Higher TP of RM31.70, Implying 22.5x FY24F P/E

We reiterate our Add call on F&N with a higher GGM-based TP of RM31.70 (ROE 13.9%, COE 7.7%, LT growth 4.5%), which implies an FY24F P/E of 22.5x vs. F&N’s post-2010 P/E mean of 24.2x. We believe the lower multiple vs. this mean is justified given the suppressed ROEs as F&N invests in its dairy farm business. We believe that as the market becomes more convinced of the improved earnings (and ROE) outlook from its dairy business, there would be room for a further re-rating in the future (see Fig 2). Problems at its dairy farm, which would negatively impact earnings, higher raw material costs, and events that negatively impact consumer sentiment are key downside risks, in our view.

Source: CGS-CIMB Research - 21 Nov 2023