INVESTMENT HIGHLIGHTS

• 2QFY18 normalised earnings lowered by -17.2%yoy to RM88.7m, lagging ours and consensus expectations

• Poor earnings performance from F&B Malaysia impacted by higher costs

• Thailand’s operations reported a subdued revenue growth

• Our call is under review pending analysts’ briefing

Earnings lagged expectations. Fraser & Neave Holdings Bhd’s (F&N) reported earnings for 2QFY18 came in lower by -13.6%yoy to RM92.6m. After adjusting for one-off items, the normalised earnings came down by -17.2%yoy to RM88.7m. This accounted for 44.8% and 46.6% of ours and consensus full year FY18 earnings forecasts respectively. In the last five financial years, the group first half of the year result on average accounted for 60% of full year earnings.

F&B Malaysia segment impacted by higher costs. Excluding oneoff items, the segment normalised operating profit for the 2QFY18 dropped by -23.3%yoy to RM36.1m despite recording higher revenue of RM581.8m (+7.0%yoy). The dismal performance was mainly due to: (i) higher input costs especially for dairy products and; (ii) higher advertising and promotions expenditure and sales incentives in conjunction with Chinese New Year celebration. These are partly offset by operational cost savings and lower overheads as a result of its transformation exercise in 2017.

F&B Thailand posted a decline in revenue. F&B Thailand revenue dropped by -3.6%yoy to RM32.5m due to the: i) challenging market conditions due to the soft economy; and (ii) loss of UHT milk revenue caused by product shortage attributed by a co-manufacturer’s plant that was damaged by fire in November 2017. However, we understand that the sale of UHT milk products has resumed this month. Meanwhile, F&B Thailand normalised operating profit declined at a slower pace (-0.9%yoy) to RM66.2m in view of lower advertising and promotions expenses.

Impact to earnings forecast. We maintain our earnings forecast pending analysts’ briefing this morning.

Interim dividend declared for FY18. The company has declared an interim dividend of 27.0sen per ordinary share for FY18, which will be payable on 7th June 2018.

Under review. We are putting our recommendation on F&N under review pending analysts’ briefing. We are maintaining our current target price of RM30.03 per share. This is based on FY19F EPS of 143.0sen pegging it to a PER of 21x.

Source: MIDF Research - 4 May 2018