INVESTMENT HIGHLIGHTS

• 4QFY17 earnings lower by -60.4%yoy to RM19.6m

• Slight decrease in earnings after one-off items adjustment

• F&B Malaysia recorded a rise in operating profit

• However, F&B Thailand posted a decline in operating profit

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

Earnings below expectations. Fraser & Neave’s (F&N)’s earnings for 4QFY17 came in lower by -60.4%yoy to RM19.6m. Excluding oneoff items mainly attributable to restructuring costs of -RM52.74m, F&N’s FY17 full year cumulative normalised earnings failed to meet our expectation but is largely within consensus estimate at 94.1% and 96.3% of full year forecasts respectively.

Slight decrease in earnings after one-off items adjustment. The company’s 4QFY17 revenue declined marginally by -0.02%yoy to RM976.3m as the decline in revenue of F&B Malaysia segment is mitigated by the growth of F&B Thailand segment. As the cost of sales recorded an increase of +7.5%yoy, gross profit margin (GPM) declined by -4.9ppts-yoy to 29.8%. The increase in cost of sales is mitigated by the reduction in operating expenses which recorded a -6.4%yoy decline. This reduction in expenses was achieved despite having to incur RM24.9m of restructuring costs for the quarter. Excluding one-off items, PBT for FY17 slightly decreased by -2.3%yoy.

F&B Malaysia recorded growth in normalised operating profit. Excluding one-off items (restructuring costs), segment normalised operating profit improved by +59.3%yoy to RM18.8m. This is despite recording a loss at the reported operating performance level of - RM11.5m. The dismal reported operating performance is due to lower revenue, higher input cost, particularly sugar and restructuring costs, partly offset by lower overheads and advertising and promotions spending. Segment revenue declined by -5.5%yoy to RM535.4m due to earlier sell-in for the 2017 Hari Raya Puasa festive season (which took place in the previous quarter) coupled with intense pricing pressure from competitors. Double digit growth in F&B Malaysia exports helped to ease the decline in domestic sales.

F&B Thailand posted a decline in operating profit. F&B Thailand revenue grew by +7.6%yoy to RM440.7m due to: i) the successful launches of two new products, i.e. Bear Brand Sterilised Milk High Folate and Bear Brand Gold Goji Berry; ii) double digit growth in exports to Indochina region; and iii) partly aided by favourable Ringgit Malaysia/Thai Baht translation. Nevertheless, F&B Thailand reported operating profit declined by -18.8%yoy to RM31.6m due to higher input costs especially milk powder, higher tactical trade spending but partially mitigated by lower advertising and promotions spending. Excluding one-off items, segment normalised operating profit also staged a declined by -13.5%yoy to RM33.7m.

Impact to earnings. No changes pending analyst briefing.

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

Source: MIDF Research - 8 Nov 2017