F&N’s FY22 earnings beat our forecast but came in broadly in-line with consensus estimate. Top-line performance will remain strong thanks to economy reopening and price adjustments in both Malaysia and Thailand with its halal food segment weighing in on strong contribution from the export markets. We raise our FY23F earnings by 16% and our TP by 12% to RM26.93 (from RM23.15). Upgrade to OUTPERFORM from MARKET PERFORM.

Beat our forecast. FY22 PATAMI beat our forecast by 10% but met market expectations. The variance against our forecast stemmed largely from stronger exports (especially in 4Q) due to the weak domestic currency and higher sales in Thailand in 4Q. DPS of 60.0 sen (implying a payout of 57%) was above our expectation of a 52% payout.

YoY, FY22 saw top-line maintaining its robustness, growing by 8% underpinned by strong showing from Malaysia climbing 14%, supported by a 3% improvement in Thailand. In local currency terms, Thailand operation saw a jump of 8% as domestic sales were boosted by the reopening of the domestic economy, product innovations and price increases especially in 4Q. In contrast, Malaysia operation was 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 and also price adjustments. Overall, GP margin (26% in line with our estimate) shrunk by 3ppt mainly caused on elevated input prices. Rising operational costs saw EBITDA margin eroding by 3ppt to 13% (in line with our estimate). There was no significant impact from Cukai Makmur with an effective tax rate of 16% (mostly coming from tax exempt income and lower tax rates on foreign jurisdictions as the statutory tax rate remained at 24%).

Solid top-line ahead. Premised on the full reopening of the economy and accommodative policies, we maintain our view of a robust and sustained top-line ahead. Its topline should be enhanced by the privatisation of Cocoaland which will enhance its topline further (c. RM200m based on FY21 Cocoaland’s financial results).

Post results, our FY23F earnings are revised higher by 16% on account of its privatisation of Cocoaland and we introduce our FY24F earnings. For FY23, we expect stable margins on account of easing of inputs prices especially in 2HCY23.

Upgrade to OUTPERFORM from MARKET PERFORM. We like F&N for: (i) the reopening of the economy driving sales particularly for beverages, ready-to-drink products, out-of-home and HORECA channels (supported by a resumption of tourist activities), (ii) softening food commodity prices that will ease margin pressures, and (iii) its earnings stability underpinned by steady demand for staple food items despite the uncertain global economic outlook.

We raise our TP valuation to RM26.93 (RM23.15 previously) ascribing an unchanged FY23F PER of 22x which is consistent with the industry’s average forward PER. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us. Also, value has emerged after the recent weakness in share price.

Risks to our call include: (i) uptick in food commodities prices, (ii) prolonged supply chain disruptions, (iii) weaker MYR/THB, and (iv) high inflation eating into consumer spending power.

Source: Kenanga Research - 9 Nov 2022