• 3QFY17 earnings lower by -25.9%yoy to RM69.4m

• Revenue and margins declined

• F&B Malaysia yet to show signs of recovery

• F&B Thailand managed to record positive growth

• Maintain NEUTRAL with an unchanged TP of RM25.47 per share based on PER18 of 21.0x

Slightly below expectation. Fraser & Neave’s (F&N)’s earnings for 3QFY17 came in lower by -25.9%yoy to RM69.4m. Consequently, the cumulative 9MFY7 earnings of RM303.7m accounted for 76% and 75% of our and consensus full year earnings forecast respectively. This is slightly below expectation as historically in the past three years, the cumulative 9M earnings accounted for an average of 81% of full year earnings.

Revenue and margins declined. The group 3QFY17 revenue declined by -6.1%yoy to RM1,041.3m mainly impacted by F&B Malaysia segment. As the cost of sales recorded a mild increase of -0.5%yoy, gross profit margin (GPM) declined -4.4ppts yoy to 32.3%. In addition, operating expenses recorded a +12.0%yoy increase which in turn decreased operating profit margin (OPM) by -3.1ppts yoy to 6.8%.

F&B Malaysia yet to show signs of recovery. F&B Malaysia revenue decreased by -14.0%yoy to RM592.5m impacted by the continuing weak consumer sentiment during the Hari Raya festive season coupled with intense pricing pressure from competitors. However, the positive growth from the F&B Malaysia exports mitigated the decline in domestic sales. Nevertheless, the operating profit declined by -61.3%yoy to RM24.2m due the higher input costs, particularly sugar, and restructuring costs.

F&B Thailand managed to record positive growth. F&B Thailand revenue grew by +6.9% to RM448.6 million, despite lower domestic volumes, aided by favourable Ringgit Malaysia/Thai Baht translation and higher exports. However, F&B Thailand operating profit declined by -2.4%yoy to RM51.5 million as a result of higher raw material costs but this is partially mitigated by cautious trade spending.

Impact to earnings. We are revising our FY17 and FY18 earnings by -3.09% and -2.88% respectively. The downward revisions are mainly due to the lower than expected performance of F&B Malaysia as well as slower growth of F&B Thailand which will impact earnings in FY17. However, over a longer term, the slower growth is temporary as it will be addressed by the; (i) a stabilise margin for F&B Malaysia as a result of internal efficiency effort it currently undergone and; (ii) continue export growth.

Retain NEUTRAL stance with revised TP of RM25.47. We are maintaining our NEUTRAL call on F&N with a revised target price of RM25.47 per share (previously RM26.23 per share), pegging F&N’s FY18 EPS of 121.3sen to unchanged FY18 PER of 21x.

Source: MIDF Research - 4 Aug 2017