INVESTMENT HIGHLIGHTS

• Completion of F&B Malaysia transformation program

• Restructuring initiatives will result in savings going forward

• Performance of F&B Malaysia expected to be better in FY18

• Ramping up export market operations

• Reaffirm NEUTRAL with an unchanged TP of RM25.47

Completion of F&B Malaysia transformation program. F&N’s FY17 concluded with the company reporting full year earnings decline of -16.1%yoy to RM323.4m. Excluding one-off items mainly attributable to restructuring costs of -RM52.74m, F&N’s FY17 normalised full year cumulative earnings declined marginally by -2.4%yoy. The management reiterated that FY17 was a challenging year for the group due to the intense competition locally as well as higher commodity prices which supressed profit margin. Nonetheless, the group has recently completed its internal restructuring program for the Malaysian segment in October to propel its growth in the coming years.

Restructuring initiatives will result in savings going forward. The objective of the restructuring is to simplify processes and having a leaner structure that minimises duplications and increases efficiencies across its dairies and soft drinks businesses. The total restructuring cost incurred in FY17 amounted to RM48.4m mostly attributable to voluntary separation scheme (VSS) which involves approximately 200 staff. Along with more efficient processes, the cost savings estimated going forward is in excess of RM40m per annum.

Performance of F&B Malaysia expected to be better in FY18. Going forward, F&B Malaysia performance should improve benefiting from a better cost structure and operational efficiency as a result of its restructuring effort. Apart from the transformational savings generated, the price of refined sugar which constitutes a significant portion of input costs is expected to be favourable in FY18. Currently, F&N sources most of its sugar needs higher than the market price as the government has fixed (early in the year) the selling prices of refined sugar to top industry players at RM2,800 per metric tonne. This contract is expected to end in December 2017. Hence, moving forward, F&N will source its sugar needs at more favourable market price of approximately RM2,300-RM2,400 per metric tonne level. In addition, the group also plans to launch new products after Chinese New Year in 2018.

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 about 15% to revenue. As a result of the intensified focus and investment, export of dairy products from Malaysia operations grew +26%yoy in FY17. Going forward, the group aims to leverage on its halal status to make further inroads into Muslim countries. As of now, export growth to Africa and Middle East grew by +30%yoy in FY17. F&N also has set a target to achieve 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 will surpass the target of RM500m sales ahead of the 2020 deadline.

Impact to earnings. We make no changes to our earning forecast for FY18 as we expect: (i) a better F&B Malaysia performance in FY18; (ii) a better margin due to transformation savings as well as lower sugar prices; and (iii) export continue to growth and contributed at least RM100m per annum.

Retain NEUTRAL with unchanged TP of RM25.47. We are maintaining our NEUTRAL call on F&N with an unchanged target price of RM25.47 per share, pegging F&N’s FY18 EPS of 121.3sen to unchanged FY18 PER of 21x. At the moment, we believe that the stock is fairly valued taking into account the estimated growth of FY18.

Source: MIDF Research - 9 Nov 2017