F&N’s 1HFY23 results met expectations. Its Malaysian operations were buoyed by festive buying and exports, but Thai operations were hurt by weak demand following price hikes. We maintain our forecasts but fine-tune our TP by 2% to RM28.44 (from RM26.11) as we roll over our valuation base year to FY24F. Maintain MARKET PERFORM.

Its 1QFY23 core net profit (excluding a RM94m fair value gain on Cocoaland’s privatisation and insurance claims from floods in 2021) met expectations at 47% and 46% of our full-year forecast and the full year consensus estimate, respectively. The declared DPS of 27 sen (implying a 48% payout) was in line with our expectations of a 50% payout.

YoY, its top line grew 10% as a strong showing from Malaysia (+19%) more than offset a flattish performance from Thailand (-3% in Thai baht). Malaysian operations were spurred by festivities’ demand, continued sales momentum given the full reopening and additional Cocoaland’s contribution. Thailand was affected by subdued domestic demand and export demand (due to sustained inflationary pressures). Its EBIT grew by a stronger 16% as favourable forex hedging and softened food commodity prices more than offset higher marketing and promotional expenses (especially in Thailand).

QoQ, its top line eased 1% due to flattish performance from Malaysia due to seasonality and Thailand (in baht terms) due to weak consumer spending on high inflation (which was partially mitigated by discounts and promotions). The discounts and promotions in Thailand resulted in a sharper 4% drop in EBIT.

Outlook. F&N’s earnings prospects remained 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 (-6%) and THB (-11%) although the same cannot be said for food commodity prices (that could still remain volatile given ongoing geopolitical tensions).

We keep our forecasts but we raise our TP by 2% to RM28.44 (from RM26.11) as we roll over our valuation base year to FY24F. Our TP is based on a PER of 22x, 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 pointed to F&B players in general lacking the ability to pass on higher input costs, resulting in margin erosion. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 5 May 2023