INVESTMENT HIGHLIGHTS

• Accelerating its transformation program with additional 200m CAPEX

• Lower tax incentive expected until FY19

• Ramping up its export to RM800m by 2020

• Reaffirm NEUTRAL with a revised TP of RM26.23

Accelerate transformation program. In FY16, the group embarked on a five year transformation journey focusing on internal efficiency that will help the group sustain its business in the competitive F&B market. The additional costs incurred in the implementation of the transformation program affected the performance of F&B Malaysia, which is in addition to the weak consumer sentiment, rising inflation and intense competition locally. Nevertheless, the group’s performance show the resilience of the group, benefiting from diversity in geographical contributions and product categories. Also, additional RM200m in capital expenditure identified to fund for projects that will help the group to be cost competitive and product innovative. The group is also poised to have a better effective tax rate at the region of 10% until FY19 due to the tax incentive and exemption from recent investment.

Ramping up its export. F&N is strengthening on its export business as it is primed to be the group’s third pillar of growth driver after F&B Malaysia and Thailand. Currently, export business contributes more than 10% to revenue. As a result of the intensified focus and investment, export of its dairies products such as condensed and evaporated milk has increased by more than 30% YTD. The solid growth was fuelled by the customisation of its product offerings and expansion of its branded products. Going forward, the group aim to leverage on its halal status to tap more fully into Muslim countries. F&N also has set a target to achive a total RM800m in export sales in which F&B Malaysia and Thailand each targeted to contribute RM500m and RM300m respectively, by the year 2020. However, looking on the the current growth trend, it is expected that the exports from Malaysia surpass will surpass the target of RM500 million sales ahead of the 2020 deadline.

Revision in earnings forecast. We are revising upward our earnings forecast for FY17 and FY18 by approximately +14% and +16% as we expect i) a stablise margin from internal efficiency strategy, ii) better F&B Malaysia performance in FY18 iii) Better than expected export growth.

Reaffirm NEUTRAL stance with a revised TP of RM26.23. We are maintaining our NEUTRAL call on F&N with a revised target price of RM26.23 per share (previously RM22.52 per share) depite the upward revision to our earnings forecast as we believe that the business is still challenged by the subdued consumer spending and stiff domestic competition. On this note, we are reiterating our NEUTRAL recommendation on F&N with a revised TP of RM26.23, pegging F&N’s EPS18 of 124.9sen to unchanged PER18 of 21x.

Source: MIDF Research - 5 May 2017