F&N guided for more stable margins going forward as it expects prices of most soft commodities to ease, although those of tin plate/cans, milk and palm oil could stay elevated into 2023. It is forging ahead with its investment of RM700-800m in an integrated dairy farm with an initial capacity of 5,000 cattle. We trim our FY23- 24F net profit forecasts by 3-5%, to reflect higher depreciation cost. Our TP is lowered by 3% to RM26.11 (from RM26.93). Maintained at OUTPERFORM.

We came away from F&N’s recent post-results briefing yesterday feeling reassured of its earnings outlook. The key takeaways from the briefing are as follows:

1. The reopening of the economy and readjustment in prices have contributed to a robust topline of c.>RM600m in the last three quarters for the Malaysian operation, given the first full-year contribution of its food segment and offset by lower export revenue coming from Greater China. Moving ahead the company is confident top-line to be >RM600m in the coming quarters. Also driving sales are the reopening of the tourism industry in Malaysia and Thailand, coupled with the coming festive season.

2. Price increases in both Malaysia and Thailand were in double digits. Milk prices in Thailand falls into 2 categories; “price control” items (fresh milk) and “price watch” items. Price adjustments were only for the latter (condensed milk) in which the local government are more flexible in raising prices.

3. F&N guided for more stable margins going forward as it expects prices of most soft commodities to ease, although those of tin plate/cans, milk and palm oil could stay elevated into 2023. Nonetheless, the higher cost of tin plate/cans can be mitigated by switching to certain more sustainable packaging such as PET and Tetra.

4. Exports contributed 19% to group revenue. Exports are to global top 89 countries (4 were added in FY22) with the MENA region contributed only 5% of total exports. We believe halal food demand also come from other Muslim countries in Central Asia, South Asia and South East Asia (Indonesia and Brunei).

5. F&N is making significant investment in agriculture and dairy farming. Its integrated dairy farm is expected to cost RM700- RM800m with an initial capacity of 5,000 cattle producing a conservative 50m litres/day. F&N intends to import Holstein cows from the USA with the farm build to suit their temperate needs. Holstein cattle can produce c.42 litres/day. The milk produced is expected to be from the A2 protein strain which is more for consumer that are lactose intolerant. The farm is expected to be operational by Dec 2024.

Forecasts. We revised down our FY23F and FY24F earnings by 3% and 5%, respectively, on account of higher depreciation cost due to the FY23F capex of RM700m. Our TP is lowered by 3% to RM26.11 on an unchanged FY23F PER of 22x, which is consistent with the industry’s average forward PER.

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.

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 - 10 Nov 2022