F&N’s 1HFY24 results beat expectations. Its 1QFY24 core net profit jumped 62% YoY thanks to a favourable product mix, lower input cost, and enhanced efficiency. We believe F&N may be benefitting from consumers opting for Asian brands. We raise our FY24-25F net profit forecasts by 12% and 13%, respectively, lift our TP by 13% to RM38.25 (from RM33.80) and maintain our OUTPERFORM call.

F&N's 1HFY24 core net profit of RM332m beat expectations, coming in at 61% each of both our full-year forecast and the full-year consensus estimate. The variance against our forecast came largely from a favourable product mix, lower input cost and better operating efficiency. A dividend of 30 sen (vs. 1HFY23: 27 sen) was declared, on track to beat our full-year forecast of 77 sen (and hence, we raise our FY24-25F dividend forecasts by 10% each to 85 sen and 87 sen, from 77 sen and 79 sen, respectively).

YoY, its 1HFY24 revenue grew by 11% with Malaysia sales rising 9% (driven largely by higher sales during the Chinese New Year and earlier Hari Raya sales period) and Thailand’s by 13% (driven by recovery in domestic sales, stronger exports to Indochina and other countries, and favourable currency exchange rate). Its core net profit jumped 62% on lower input cost and an absence of a previous year’s one-off RM89m fair value gain from Cocoaland.

QoQ, its top line increased by 1.5% on a festive sales boost from Chinese New Year and Hari Raya. However, its PBT eased 0.5% on higher operating and marketing expenditures.

Outlook. We believe F&N may be benefitting from consumers opting for Asian brands (vs. the Western ones) and will continue to be buoyed by the return of tourists to Malaysia (boosting its domestic sales), and Thailand (boosting its export sales). We also like its focus on the high- growth Halal packaged food and dairy products while the streamlining of the manufacturing facilities of Sri Nona and Cocoaland should boost efficiency and hence the bottom line.

Forecasts. We raised our FY24F and 25F net profits by 12% and 13%, respectively, after raising our assumptions on sales and margins.

Valuations. Consequently, we also raise our TP by 13% to RM38.25 (from RM33.80 previously) based on an unchanged 22x FY25F PER, 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).

Investment case. We continue to like F&N for: (i) its earnings defensiveness given the stable demand for essential food items despite high inflation and an uncertain global economic outlook, (ii) the rising popularity of ready-to-drink products where F&N has a strong presence, and (iii) proxy to the recovery of domestic consumption and the return of tourists in Thailand. Maintain 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 - 2 May 2024