We deemed 9MFY21 results above expectations with top-line remaining consistently robust despite the prevailing lockdowns and FMCO as strong export sales, sustained demand for its dairy products and contribution from its recent acquisition - Sri Nona Group sustained earnings. At current price the stock is undervalued and bottoming out. Buy on weakness. Reiterate OUTPERFORM on an unchanged TP of RM33.15.

Above. 9MFY21 PATAMI of RM336m accounts for 80%/78% of our/consensus estimate. We deemed this to be above expectations given the prevailing restrictions as compared to the previous corresponding coupled with the FMCO in June. No dividend declared as expected.

YoY, Top line saw a +7% uptick to RM3.2b as both Malaysian and Thailand operations saw continuous improvement at +8% and +5% respectively with no major change in topline contribution at 52%48% (Malaysia/Thailand). Malaysia’s growth was underpinned by continued growth for food business, canned milk, and double-digit growth in export sales, with halal markets generating over RM130 million revenue. Thailand’s growth was sustained in both domestic and Indochina markets supported by active promotions and premium programmes. Overall GP margin saw a slight dip by 110bps to 30% due to higher commodity prices and spike in international freight charges negated by better export margins. Opex saw a +3% uptick largely due to unplanned Covid expenses, input and restructuring expenses. PATAMI of RM336m (+4%) was further boosted by a lower ETR (19%) attributed to investment tax incentives enjoyed by its Thai subsidiary.

QoQ, topline saw a 3% dip to RM1.06b lower beverages and dairies revenue, affected by the prevailing restrictions and FMCO and lower export revenue but partly negated by seasonal peak in Food revenue from the sale of rice cakes and other products during the recent festive season. While Malaysia’s topline fell 4%, Thailand was marginal at 1%. GP margin was stable at 29% but EBITDA margin fell 5ppts to 14% largely due to higher opex (+31%) attributed to unfavourable input costs, restructuring expenses (RM8m) and absence of one-off A&P promotion fund. Despite the lower ETR (19%) PATAMI fell 7% to RM96m

Poised for Growth. The herd immunity target by December 21 is a welcome boost on F&N given its resilience in this pandemic period. Premised on the ease of restrictions coupled with year-end activities and pent-up demand, we see robust and sustained earnings ahead. Its investments into the Sri Nona Group proves its worth in the recent festive season and providing the platform to venture into the halal food segments and product offerings and likely expanding its halal exports in MENA region and ASEAN. While volatile commodity prices are still a concern, we take comfort in the Group’s hedging activities which have kept GP margins at a reasonable level at 29% (or 2ppts below its pre- pandemic level. We further take comfort in its net cash of RM580m implying further capex ahead will be funded through internally generated earnings, hence funding cost will be negligible.

Post results, we make no change to our FY21E/FY22E numbers.

Moving forward, we maintained our TP of RM33.15 on a FY22 PER of 28.5x (close to its 5-year mean) – which we feel is justified given its robust earnings despite the pandemic and volatile commodity prices. Trading at a 5-year low, we feel the price has bottomed out given the ramp up in the vaccinations. Buy on weakness. Reiterate OUTPERFORM.

Risks to our call include: (i) Pandemic proving resilient against the vaccinations, (ii) volatile commodity prices and iii) unfavourable Ringgit.

Source: Kenanga Research - 5 Aug 2021