• 1QFY17 earnings lower by -16.1%yoy at RM127.3m

• Declining operating margin due to restructuring costs

• F&B Malaysia’s performance affected by higher cost

• F&B Thailand remains the main profit contributor

• Maintain NEUTRAL with a revised TP of RM22.52 per share based on PER18 of 21.0x

Within expectation. F&N’s 1QFY17 earnings declined by -16.1%yoy to RM127.3m. The earnings made up 35% and 32% of ours and consensus full year estimates respectively as 1Q is historically the strongest performing quarter. The fall in earnings is mainly due to the increased in operating expenses by +14.8%yoy.

Declining operating profit margin (OPM). The revenue increased by a modest +2.0%yoy, outpacing the increase in cost of sales of +0.4%yoy. This resulted in a stable gross profit margin of 35.8% (+1.0ppts yoy increased). However, due to organisational restructuring costs incurred, OPM declined by -2.9ppts yoy to 13%.

F&B Malaysia’s performance affected by higher cost. Revenue for F&B Malaysia increased by a modest +1.1% to RM647.1m. This was despite the stiff price competition and the weak consumer sentiment. Operating profit decreased by -26.1% to RM60.4m which is a consequence of higher raw material prices especially sugar, organisational restructuring costs and higher trade and consumer promotion spending. Due to these, OPM declined by -3.4ppts yoy to 9.3%.

F&B Thailand remains the main profit contributor. Revenue for F&B Thailand segment rose by +3.6% to RM443.7m due to the more favourable MYR/THB conversion rate although volume was flat. Operating profit rose by +17.3% to RM78.1m assisted by the favourable milk-based commodity costs. Hence, OPM increased by +2.1ppts yoy to 17.6% due to lower raw material costs.

Maintain NEUTRAL stance with revised TP of RM22.52. We maintain our NEUTRAL stance on F&N whilst rolling forward our valuation base year to FY18 with a target price of RM22.52 (previously RM20.69 per share). This is after taking into account its growth prospect in FY18 as well as the uptrend in commodity prices which is expected to increase the overall raw material costs. In addition, we have also factored in the additional revenue and cost savings gained through F&N restructuring initiatives. Our target price is based on PER18 and EPS18 of 21x and 107.26sen respectively.

Source: MIDF Research - 8 Feb 2017