F&N's FY24 core net profit, adjusted for forex, surged 18% YoY. Aside from lower input costs, rising sales with a favourable product mix came in within expectation, and were evident in both Malaysia and Thailand. However, bottom line was a miss on start-up costs that crept up in 4QFY24 for the Gemas dairy farm investment. Pending briefing on 6 November for clarity on the nature of these start-up costs, and the options F&N would explore to overcome delay in livestock arrival, we keep our OUTPERFORM call. Our TP is however lowered by 5% to RM36.30 on operating cost tweaks for FY25.

F&N's FY24 core net profit, adjusted for forex, of RM565m came in below expectations, missing our forecast and the consensus estimate by 7% and 6%, respectively. The key variance against our forecast was largely due to elevated start-up costs from the dairy farm business.

It declared a final dividend of 33 sen in 4QFY24, bringing FY24 dividend to 63 sen (FY23: 77 sen, which included a 17 sen special dividend). This implies a dividend payout ratio of 43%, below its historical trend of 55%, as we reckon the company is prioritising its new dairy farm investment in the near term.

YoY, its FY24 turnover improved 5% driven by higher sales from domestic operations in: (i) Malaysia (+3%), due to strong festive demand and sustained growth across all channels, fuelled by targeted marketing efforts and expanded outlet presence, and (ii) Thailand (+7%), supported by stronger exports to Cambodia with successful promotion, especially for its Bear Brand sterilised milk. Its core net profit grew by a larger 18%, thanks to lower input costs and favourable product/country mix.

QoQ, its 4QFY24 top line slipped by 4%, due to softer sales in Malaysia, as the company recalibrated trade inventories ahead of the festive season kicking off in the next quarter (Oct-Dec). Its core net profit fell by a sharper 8%, mainly due to higher costs associated with its dairy farm and agriculture business (included in 'Others' segment).

QoQ, the 'Others' operating loss rose from RM5.0m to RM35.6m.

Outlook. We believe F&N may continue to benefit 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.

The construction of the integrated dairy farm in Gemas (known as F&N AgriValley) remains on track. Recall that the first phase of the project is expected to be completed, with milking set to begin by early 2025.

However, the delivery of first batch of livestock from the U.S., initially scheduled for 29 Oct 2024, has been postponed due to a suspension issued by the Malaysia Department of Veterinary Services over avian flu concerns has said it is exploring options.

Forecasts. We cut our FY25F earnings by 5% to account for higher costs, mainly due to housekeeping changes for tax assumption following the expiry of tax incentive for F&B Thailand post-3QFY24.

Also, we introduce our FY26F numbers. Note that we have not included any contribution from the new dairy farm investment, pending further clarity from its results briefing on 6 Nov.

Valuations. Consequently, we reduce our TP by 5% to RM36.30 (from RM38.25), while keeping 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, (iii) proxy to the recovery of domestic consumption and the return of tourists in Thailand, and (iv) its long-term growth prospects driven by its investment in a sizeable dairy farm in Gemas, Negeri Sembilan. Reiterate OUTPERFORM.

Risks to our call include: (i) an uptick in food commodity prices, (ii) sustained high inflation eating into consumer spending power, (iii) downtrading by consumers i.e. opting for more affordable alternatives, (iv) unforeseen and sustained delays in starting the dairy business.

Source: Kenanga Research - 6 Nov 2024