INVESTMENT HIGHLIGHTS

• 3QFY18 earnings improved by +50.6%yoy to RM49.1m, inline with ours and consensus expectations

• F&B Malaysia segment recorded higher profit

• F&B Thailand posted a decline in revenue

• Maintain SELL with a TP of RM28.30

Earnings within our expectations. Fraser & Neave Holdings Bhd’s (“F&N”) reported earnings for 3QFY18 came in higher by +50.6%yoy to RM104.5m. Nevertheless, the cumulative 9MFY18 earnings grew marginally by +0.1%yoy to RM303.9m. This is within ours and consensus expectations, accounting for 75.1% and 73.0% of full year FY18 earnings forecasts respectively.

F&B Malaysia segment recoded higher profit. F&B Malaysia segment’s normalised operating profit for the 3QFY18 increased by +45.2%yoy to RM49.1m. The stellar performance was mainly due to: (i) operational cost savings and lower overhead and; (ii) favourable input cost for sugar for the quarter as compared to the corresponding quarter. However, these are partly offset by; (i) higher dairy-based input and packaging material costs and; (ii) higher advertising and promotional expenditure for festive season.

F&B Thailand posted a decline in revenue. F&B Thailand revenue dropped by -2.9%yoy to RM435.4m due to the challenging market conditions. This is partly offset by higher export sales. Meanwhile, the normalised operating profit improved by +11.4%yoy to RM51.5m in view of lower input and packaging material costs.

Impact to earnings forecast. We are maintaining our earnings forecast as it is largely within our expectation.

Prospect. Previously, F&N experienced sales growth dropped a quarter earlier prior to the implementation of GST as dealers and distributers destocked their inventory level. Hence, with the upcoming implementation of the new SST effective from 1 September 2018 onwards, we would expect this activity would take place re-occur in the 4QFY18.

Maintain SELL. Due to the recent price rally, current PER is now more than 40.0x while dividend yield has dropped to about 2.0%. At the current trading price, the stock is overvalued in comparison to the two-year historical PER of 26.7x. All factors considered, we are maintaining our SELL recommendation with an unchanged target price of

RM28.30 per share. Our valuation is based on FY19F EPS of 132.8sen pegging it to a target PER of 21.3x which is -1.0SD below the two-year historical average.

Source: MIDF Research - 3 Aug 2018