F&N’s 9MFY22 earnings beat our forecast but came in broadly in-line with consensus estimate. While its topline performance will remain strong thanks to economy reopening in Malaysia and Thailand, cost pressures will weigh. We raise our FY22E/FY23E forecasts by 6%/13% largely to reflect a slightly stronger recovery from the economy reopening. However, we lower our TP by 12% to RM23.15 as we ascribe a lower PER multiple to reflect a higher risk premium for the industry as a whole on a potentially prolonged elevated high inflationary environment. Downgrade to MARKET PERFORM from OUTPERFORM.

Beat our forecast. 9MFY22 PATAMI of RM284m beat our full year forecast at 86%, but met market expectation at 76%, of full-year estimate. The positive deviation from our forecasts stems from strong contribution from Malaysia boosted by festivities and the reopening of the economy. No dividend was declared for this reporting quarter.

9MFY22 saw topline maintaining its robustness, growing by 3% to RM3.3b underpinned by strong showing from Malaysia climbing 9% to RM1.8b but mitigated by weaker Thailand declining 3% to RM1.5b on account of the unfavourable Baht. In local currency terms, Thailand operation saw a moderate 2% growth to THB12b as domestic sales were affected by price increases. In contrast, Malaysia’s operations were boosted by strong performance given the festivities period in 1HCY22 with strong contribution of coming from its halal food segment in both the local and Middle East markets. Overall, GP margin (26% in line with our estimate) shrunk by 4ppt mainly caused on elevated input prices. Rising operational costs saw EBITDA margin eroding by 6ppt to 13% (in line with our estimate). 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, despite a moderation in sales growth at 1% to RM1.1b, PATAMI saw a 4% hike to RM98m as GP margin saw a 1% uptick to 26% while EBITDA margin remained flat at 13%. Higher sales and selling prices (only in Malaysia) and better product mix contributed to the stable margins.

Solid topline ahead but with input costs risk. Premised on a full reopening of the economy, we maintain our view of a robust and sustained topline ahead. Despite the prevalent headwinds, the encouraging momentum economic activities recovery 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 to remain elevated well into 2023.

Post results. We raise our FY22E/FY23E forecasts by 6%/13% largely to reflect a slightly stronger recovery from the economy reopening. However, we lower our TP by 12% to RM23.15 (from RM26.30 previously) as we ascribe a lower FY23E PER of 22x (from 28x previously) to reflect a higher risk premium for the industry as a whole on a potentially prolonged elevated high inflationary environment, which is also more consistent with the industry’s historical average 1-year forward PER. There is no adjustment to TP based on ESG of which it is given a 3-star rating as appraised by us. Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our call include: (i) further uptick in commodity prices, (ii) prolonged supply chain disruptions, and (iii) weaker Ringgit/Baht.

Source: Kenanga Research - 4 Aug 2022