• We reiterate our Add call on F&N, with a higher GGM-derived target price of RM38.60 as we raise our EPS estimates post-1HFY24 results and briefing.

• Underlying revenue growth has been better than we expected as both F&N’s Malaysian and Thai F&B businesses are seeing strength across products.

• At 20.4x CY24F P/E, valuations are attractive vs. other Malaysia consumer staple peers, as well as against its historical mean of 24x.

Revenues - stronger for longer

We raise our revenue growth assumptions for F&N after a stronger-than-expected performance in 1HFY9/24, with a new FY23-26F revenue CAGR of 7.0%, vs 4.7% previously. 1HFY24 group F&B revenue growth (10% yoy) was better than we expected after a very strong FY23 revenue growth of 11.9% - even after taking into account the earlier Hari Raya sales season in 2024 and the fact that Cocoaland’s accounts were consolidated from Nov 2022 (i.e. 2 months of 1QFY23). While we expect seasonality to weigh on 2HFY24’s revenue growth, the start of its dairy farm operations in early-2025 should be an added catalyst to FY25F revenue growth. In the meantime, cash handouts to lower income households, higher civil servant salaries (from 2025) and EPF Account 3 withdrawals are all incremental positives for F&N’s revenue trajectory, in our view.

Dairy farm – a new driver but margins likely to weigh

While we increase our FY24F/25F/26F core EPS by 11.2/12.1/15.6%, we do expect a slowdown in core net profit growth into FY25F as F&N’s dairy farm comes on stream. Management expects first milking to take place in early-2025, with the farm likely to take three years to achieve breakeven. Against this backdrop, we expect F&N’s EBITDA margins to dip in FY25F (-0.2% pts to 15.8%) before recovering in FY26F.

Undemanding valuations vs. peers and history

We reiterate our Add call on F&N Holdings, with a higher GGM-derived target price of RM38.60 (ROE 15.9%, COE 7.7%, LT growth 4.5%), vs. RM31.70 previously, as a result of higher ROE estimates (15.9% vs. 13.9%) fueled by our increased estimates. At 20.4x CY24F P/E, valuations are undemanding vs. its large cap consumer staple peers (at >30x P/E), as well as its historical mean P/E of 23.9x. We see continued revenue and net profit growth from our positive outlook for consumer demand, coupled with a successful launch of its dairy farm operations, as key rerating catalysts for F&N’s shares. Key downside risks would come from inadequate cash handouts to compensate lower income households from the government’s subsidy rationalisation programmes, as well as poor yields from its dairy farm and sharp increases in raw material costs, both resulting in lower margins.

Source: CGS-CIMB Research - 8 May 2024