F&N intends to drive its top line growth in FY24 via a higher sales volume (vs. carryover price hikes effect in FY23). Significant price hikes in FY24 are unlikely given the stable food commodity price trend. Meanwhile, its dairy farm in Negeri Sembilan is on track for its “first milk” in 2025. We maintain our forecasts, TP of RM29.40 and OUTPERFORM call.

We came away from F&N’s post-results briefing feeling positive on its prospects. The key takeaways from the briefing are as follows:

1. Growth driven by sales volume in FY24. F&N intends to drive its top line growth in FY24 via a higher sales volume (vs. carryover price hikes effect in FY23) through a diverse portfolio, strategic route-to-market initiatives and deepening of customer engagement. Additionally, F&N is also focusing on exports, which provide a natural hedge against currency fluctuations, and prioritizing the integration of its food manufacturing plants and dairy farm initiatives. Recall, F&N's FY23 turnover rose 12% YoY to RM5b, driven by the full-year impact from an average 5% hike in product prices in FY22 and a favourable product mix, not so much from volume growth. Leveraging on its strong brand value, F&N was able to raise prices without significantly hurting its sales volume in FY23. The good news is it may not even need to risk its sales volume with price hikes in FY24 given the stable food commodity price trend.

2. Building the largest dairy farm in SEA. The first phase of F&N’s RM1.3b dairy farm in Gemas, Negeri Sembilan—potentially the largest in Southeast Asia—will boast of 4,000 milking cows by 2025 (20% of its full capacity of c.20k dairy cattle). This investment will reduce the group's reliance on imported milk. The farm will be fully integrated with a processing capacity of 100m litres of fresh milk annually, catering to both domestic and export markets.

3. Rawang hub streamlined. F&N is poised to reinforce Halal packaged food as a central aspect of its operations by streamlining the manufacturing facilities of Sri Nona and Cocoaland. The Cocoaland’s site in Rawang is designated to evolve into the primary hub for food production, in line with the Group's strategy to centralize its food manufacturing. This move is expected to lead to increased production efficiency and a more simplified set of operational procedures.

4. F&N’s 140th anniversary. In conjunction with the event this year, it has launched several campaigns and new product offerings. Notable campaigns included the revamped F&N CSD ‘Kini Lebih Gempak’, rebranding efforts for F&N Magnolia and F&N SEASONS, the launch of 100PLUS Zero with the "Cuba Try Taste" initiative for World Hydration Day, and the F&N Teh Tarik ‘Biar Ori, Baru Sempoi’, as well as Nona Dapur Tempur. The year was also notable for the introduction of new product lines such as 100PLUS Pro, the fragrant Nona Ketupat Wangi Haruman Pandan, and the Lot 100 Kurma Gummy, along with packaging innovations like the 1L Teapot Evaporated Creamer UHT. The introduction of these new offerings have successfully captured consumer interest, and are likely to command higher selling prices and contributing to the group's increased turnover in FY23. Moving into FY24, F&N is set to introduce another two new products, namely Borneo Springs, a natural mineral water, and OMILK (a whole oat grains that contain 100% plant-based with no trans-fat or cholesterol) in Malaysia.

Forecasts. Maintained as we have adequately reflected the above-mentioned trends. Consequently, we also keep our TP at RM29.40 based on unchanged FY24F targeted PER of 22x, consistent with the industry’s average historical 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) its earnings defensiveness underpinned by the steady demand for staple food items, (ii) its margin recovery driven by softening food commodity prices, (iii) its strong brand recognition, and (iv) its long-term growth prospects driven by its investment in the sizeable dairy farm in Gemas, Negeri Sembilan. Maintained OUTPERFORM.

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

Source: Kenanga Research - 9 Nov 2023