F&N announced its plan to enter the upstream fresh milk business with the proposed acquisition of Ladang Chuping from MSM Malaysia. Despite minimal near-term impact, we are positive on the long-term benefits from this venture as this would allow the group to have a firmer grasp on its fresh milk processing margins, consequently sharpening its competitive edge over peers in the longer run. Maintain MP with TP of RM36.60.

Moving into upstream fresh milk business. To recap, the group had earlier entered into a conditional agreement with MSM Holdings to acquire Ladang Chuping in Perlis (approx. 4,453.92 hectares) for a cash consideration of RM156.0m. Last Friday, the group elaborated that the land would be utilised for its upstream insourcing of fresh milk with an estimated financial commitment of RM650m (inclusive of land purchase and clearance costs) for Phase 1. For the first phase, 4,000 milking cows will be imported, yielding a potential output of 40m litres of fresh milk/year with subsequent phases to take place upon stabilisation of the first. The land is capable to host up to 20,000 milking cows which yield a potential output of 200m litres of fresh milk/year.

Minimal near-term impact. Land acquisition is anticipated to be completed in 2020 with the commencement of the upstream milk insourcing earmarked to be within 24 months after the land acquisition. Hence, we are of the view that this poses minimal impact to the group’s sales and earnings in the immediate term. Additionally, as the group would still be in a comfortable net-cash position post-acquisition, we do not anticipate any meaningful uptick to interest expenses. Moreover, assuming a 10% depreciation rate per year, the incremental depreciation rate from the new land would only marginally dampen our FY20E earnings forecast by c.1-2%, which we find immaterial.

Serving as a longer-term prospect. In the longer-term, we are positive on the group’s venture into the upstream fresh milk business. This should ease the group’s dependency on milk imports and partially shield the group from drastic fluctuations in dairy prices and forex. Allin, this should warrant the group a firmer grasp on its fresh milk manufacturing margins. Not only will it better complement its existing downstream production and distribution of fresh milk, the added capabilities would boost its competitive strength against peers. Nonetheless, we reiterate our view that this new venture is a longerterm prospect booster. As such, we rule out any earnings accretive development over the next two years.

Maintain MARKET PERFORM with TP of RM36.60. Postannouncement, there are no changes to our earnings forecasts. With an ascribed 30.0x FY20E PER (closely in line with +1.0SD over the stock’s 3-year mean), we deem our valuations to be fair at this juncture, premised on the premium valuations attached to large-cap F&B stocks in lieu of their defensive earnings. Yet, dividend could be a slight dampener with anticipated low yield of c.2%.

Risks to our call include: (i) higher/slower-than-expected growth in the Malaysia and Thailand F&B business, and (ii) higher/lower-thanexpected operating costs.

Source: Kenanga Research - 14 Oct 2019