As expected, F&N posted a robust top-line performance but a weaker Baht saw contribution from its Thailand operation heading south. With the easing of movement controls, we expect sales to continue to be robust in the coming quarters, but downside pressure on margins looks to persists well into FY23. TP is reduced to RM26.30 on an unchanged FY23E PER of 28x as we expect earnings to remain under pressure on elevated inputs costs and higher capex. Still undervalued, we maintained it at OUTPERFORM.

Above expectations. 1HFY22 PATAMI of RM187m accounts for 62%/46% of our/consensus estimates. The positive deviation from our estimates is due to lower-than-expected impact of the Prosperity Tax. As expected a DPS of 27.0 sen was declared for this quarter (similar to the previous corresponding period.

YoY, top-line saw a moderate uptick of 2% to RM2.21b (accounting for 51% of our estimates), dragged by F&B Thailand which saw a 2% decline to RM1.02b (due to unfavourable RM/THB translation) vs. F&B Malaysia which saw a 5% uptick to RM1.19b. This was driven by a strong second quarter benefitting from the lifting of movement restrictions. For F&B Thailand, sales continued to grow through new product introductions, promotions, expansion of distribution coverage but were offset by lower traffic at HORECA channel and modern trade outlets. Overall GP margin (26% in line with our estimates) shrunk by 4ppt mainly caused by F&B Thailand due to inability to pass rising inputs costs (compounded by price control). Rising operational costs saw EBITDA margin eroding by 6ppt to 13% (in line with our estimates). No significant impact from Cukai Makmur with ETR at 15% (mostly coming from tax exempt income and lower tax rates on foreign jurisdictions as the statutory tax rate remained at 24%).

QoQ, top-line moderated to RM1.11b, dragged predominantly by F&B Thailand (-7% vs. F&B Malaysia: +7%). EBIT margins improved slightly by 30bps due to writebacks which saw PBT improving 3%.

Solid top-line ahead but with input costs risk. Premised on the endemic phase, we maintain our view of a robust and sustained top- line ahead. Despite the prevalent headwinds, the encouraging momentum of recovery of economic activities will continue to drive sales ahead, particularly for beverages, ready-to-drink products, out-of- home and HORECA channels. Rising input costs is the only dampening factor with leading indicators showing input prices looking only to recede in 2HCY22.

Post results, our FY22E earnings are revised upwards by 10% (on lower impact from Cukai Makmur) to RM330m. However, FY23E earnings are slashed by 22% as we reduced our GP margin by 3ppt and impute higher D&A costs on account of higher capex ahead following the acquisition of Ladang Permai Damai.

Moving forward, we reduced our TP to RM26.30 (from RM34.25 previously) on FY23 PER of 28.3x (5-year mean). We feel this is justified given its robust top-line capitalising on reopening of borders and easing of movement controls in both Malaysia and Thailand. Furthermore, its strong net cash position of c. RM320m will easily absorb additional costs to sustain sales. Undervalued currently, we maintain it at OUTPERFORM.

Source: Kenanga Research - 28 Apr 2022