INVESTMENT HIGHLIGHTS

• 1QFY18 normalised earnings lower by -16.7%yoy to RM109.7m, in line with ours and consensus expectations

• Poor earnings performance from F&B Malaysia and Thailand’s operations due to higher operating costs

• We expect that the group will record a stronger earnings performance in the 2QFY18 due to festive purchase and expectation of healthier profit margin

• Maintain NEUTRAL with a revised TP of RM30.03

Earnings within expectations. Fraser & Neave Holdings Bhd’s (F&N) reported earnings for 1QFY18 came in lower by -16.1%yoy to RM106.8m. After adjusting for one-off items, the normalised earnings came down by -16.7%yoy to RM109.7m. This accounted for 25% of ours and consensus full year FY18 earnings forecasts. Historically, the group first quarter result normally accounted for 35-40% of full year earnings. Nonetheless, the drop in earnings is within our expectation as we believe that the group will record a stronger 2QFY18 performance mainly due to the: (i) Chinese New Year (CNY) celebration which will boost 2QFY18 sales and; (ii) better profit margin in view of declining sugar cost.

F&B Malaysia segment recorded a weaker earnings performance. Excluding one-off items, segment normalised operating profit for the 1QFY18 dropped by -39.8%yoy to RM41.2m. The dismal reported operating performance is mainly due to: (i) later celebration of CNY in 2018 which falls two weeks later than last year; (ii) reduction in purchase by retailers in certain states in peninsular Malaysia and Sabah due to the anticipation of flood occurrence in the monsoon season; (iii) higher input cost particularly sugar cost and; (iv) continuing refinement work post completion of the transformation the company undergone in FY17.

F&B Thailand posted a decline in operating profit. F&B Thailand revenue grew by +5.5%yoy to RM468.2m due to the: i) double digit growth in exports and ii) expansion of new distribution coverage in the Indochina region. Nevertheless, F&B Thailand normalised operating profit declined by -3.1%yoy to RM75.6m due to the: (i) higher input costs, (ii) provision for inventories damaged in a fire at a comanufacturer plant and these are partly offset by higher volume and lower advertising and promotional expenses.

Future prospects. We believe that the company’s earnings performance will improve in the next quarter (2QFY18) due to: (i) Chinese New Year (CNY) celebration; (ii) lower refined sugar cost following from the downtrend of international raw sugar price which fell to 13.8cents per pound from a peak of about 20.0cents per pound in FY17; and (iii) the stronger Ringgit will stabilize cost of input materials.

Final dividend declared for FY17. The Company has declared a final dividend of 30.5sen per ordinary share for FY17, which will be payable on 9 February 2018. This brings the FY17 total dividend to 57.5 sen.

Maintain NEUTRAL with a revised TP of RM30.03. We rolled forward our valuation based to FY19F pegging its FY19 EPS of 143.0sen to unchanged PER of 21x. All in, we are maintaining our NEUTRAL call on F&N with a revised target price of RM30.00 (previously RM25.47).

Source: MIDF Research - 7 Feb 2018