INVESTMENT HIGHLIGHTS

• 2QFY17 earnings higher by +18.2%yoy to RM107.1m

• GP margin declined but OP margin improved

• F&B Malaysia’s performance still on a declining trend

• F&B Thailand remains the growth driver

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

Above expectation. Fraser & Neave’s (F&N)’s earnings for 2QFY17 came in higher by 18.2% to RM107.1m. As a result, the cumulative 9MFY7 earnings of RM234.3 is above expectation as it accounted for 64.9% and 63.2% of our and consensus full year earnings forecast respectively.

Gross profit margin (GPM) declined but operating profit margin (OPM) improved. The GPM in 2QFY17 declined -0.8ppts yoy to 35.3%. This is mainly due the higher rate of decline in revenue of - 2.0% yoy while cost of sales only reduced by -0.7% yoy. However, the OPM improved by +1.1ppts to 11.3%. The improvement is attributable to the decrease in operating expenses by -9.6% yoy.

F&B Malaysia’s performance still on a declining trend. F&B Malaysia’s revenue declined by -13.9%yoy to RM543.9m, impacted by weak consumer sentiment coupled with intense competition amongst F&B players in the domestic market. The decline was also due to earlier sell-in for the 2017 Chinese New Year festive season which took place in the 1QFY17 and partly offset by double digit export sales growth. Its operating profit reduced by -25.9%yoy to RM47.6m impacted by higher input costs, particularly sugar.

F&B Thailand remains the growth driver. F&B Thailand’s revenue grew strongly by +17.5%yoy to RM448.5m due to the higher demand for its core brands and aided by favourable Ringgit Malaysia/Thai Baht translation. Its operating profit increased by +62.0%yoy to RM66.8m aided by favourable milk-based commodity and packaging costs as well as cautious trade spending.

Interim dividend declared of 27sen per share. An interim single tier dividend of 27sen per share for the financial year ending 30 September 2017 (FY17), payable on June 15.

Impact to earnings. No impact to earnings pending analyst briefing this morning

Retain NEUTRAL stance with unchanged TP of RM22.52. We maintain our NEUTRAL stance on F&N with an unchanged target price of RM22.52 per share. Our target price is based on PER18 and EPS18 of 21x and 107.3sen respectively

Source: MIDF Research - 4 May 2017