F&N’s 1QFY23 results met expectations. Its Malaysian operations were buoyed by festive buying and exports while Thai operations were weighed down by price hikes. F&B players in general are at the mercy of food commodity prices as they lack pricing power. We maintain our forecast and TP of RM26.11 but downgrade our call to MARKET PERFORM from OUTPERFORM as valuations have become rich after the recent run-up in share price.

1QFY23 core net profit (excluding RM94.3m fair value gain on Cocoaland privatisation and insurance claims from floods in 2021) met expectations at 24% and 25% of our full-year forecast and the full-year consensus estimate, respectively. No dividend was declared (as dividends are usually declared in the 2nd and 4th quarters).

YoY, top line grew 10% as a strong showing from Malaysia (+24%) more than offset a weaker performance from Thailand (-5%). It Malaysian operations were buoyed by festive buying, double-digit sales recovery in key export markets (such as North America, Europe and Middle East, partially dampened by lower sales to China), and the consolidation of Cocoaland’s top line following F&N’s recent privatisation of the unit. The performance of Thai operations was hit by lower export sales to Indochina on price hikes while domestic revenue remained flat despite higher selling prices (which indicated a contraction in sales volume). EBITDA grew by a stronger 16%, indicating an easing in cost pressures.

QoQ, top line grew 7%, similarly, as a stronger performance from Malaysia (+19%) more than cushioned a weaker showing from Thailand (-6%). EBITDA largely grew in line at 6% as input costs remained stable, underpinned by forward purchases (varying from three, six, nine and 12 months depending on its views on the price outlook of each food commodity).

Outlook. F&N’s earnings prospects are positive, premised on the full year impact of the economy reopening, accommodative policies, bigger celebrations of coming festivities, the return of international tourists in both Malaysia and Thailand and a recovery of export sales driven by China’s reopening. Meanwhile, the downside risk to margins is a lot more manageable given the weakening of the USD against both the MYR (-12%) and THB (-18%), although the same cannot be said of food commodity prices (that remain volatile). Top line will be boosted by full-year contribution from Cocoaland which has been privatised (c. RM200m based on Cocoaland’s FY21 financial results).

We maintain our forecasts and TP of RM26.11 based on an unchanged FY23F PER of 22x, which is consistent with the industry’s average forward PER. There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4).

We continue to like F&N for: (i) the strong recovery in demand for its products on the reopening of the economy and international borders, particularly, for beverages, ready-to-drink products, out-of-home and HORECA channels, (ii) the recovery in its export sales driven by China’s reopening, and (iii) the resilience in demand for staple food items amidst the uncertain global economic outlook. However, recent experience points to F&B players in general lacking the ability to pass on higher input costs, resulting in margin erosion. Downgrade to MARKET PERFORM from OUTPERFORM as valuations have become rich after the recent run-up in its 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 - 7 Feb 2023