F&N’s 9MFY23 results met our forecast but missed market expectations. 3QFY23 EBIT of its Thai operations jumped 35% QoQ thanks to the recovery in exports and domestic consumption, the gradual return of tourists and lower input cost. We maintain our forecasts and TP of RM28.44 but upgrade our call to OUTPERFORM from MARKET PERFORM as value has emerged.

Its 9MFY23 core net profit of RM312.2m (excluding the RM94m fair value gain on Cocoaland’s privatisation and insurance claims from floods in 2021, and RM7.1m property impairment) met our expectation at 72% of our full-year forecast but missed market expectations at only 66% of the full-year consensus estimate. No dividend was declared as F&N normally declares dividends in 2Q and 4Q.

YoY, its top line grew 13% with strong showing from both Malaysia (+19%) and Thailand (+5%). Its sales in Malaysia were spurred by festive demand, economy normalisation, price hikes and full contribution from Cocoaland. Meanwhile, its sales in Thailand were underpinned by the recovery in exports and domestic consumption, and the gradual return of tourists, especially in 3Q. Its EBIT grew slightly stronger at 15% as higher marketing and promotional expenses (especially in Thailand) were offset by more benign commodity prices.

QoQ, its top line rebounded 10% as sales rebounded in both Malaysia (+6%) and Thailand (+17%). Its overall EBIT only grew 3% as a 35% jump in EBIT of its operations in Thailand (due to improved operational efficiency on a significantly expanded top line) was partially offset by a 45% drop in EBIT of its operations in Malaysia (due to higher discounts and promotions).

Outlook. F&N’s earnings prospects remain positive, premised on the full-year impact of the economy reopening, accommodative policies, bigger celebrations of festivities, the return of international tourists in both Malaysia and Thailand and a recovery of export sales underpinned by a weak currency. Meanwhile, the downside risk to its margins is a lot more manageable given the recent weakness of the USD against both the MYR (-2%) and THB (-6%), although the same cannot be said for food commodity prices (that could still remain volatile given the ongoing geopolitical tensions).

Forecasts. Maintained.

Consequently, we also keep our TP at RM28.44 based on FY24F 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 due to cheaper products, (iii) the resilience in demand for staple food items; (iv) easing inflation boosting consumption; and (v) a recovery in Thailand driven by domestic demand and tourist arrivals. Upgrade to OUTPERFORM from MARKET PERFORM as value has emerged after the recent weakness in its share price.

Risks to our call include: (i) an uptick in food commodities prices, (ii) sustained high inflation eating into consumer spending power; and (iii) downtrading by consumers i.e. switching to cheaper alternatives.

Source: Kenanga Research - 4 Aug 2023