INVESTMENT HIGHLIGHTS

• Pulau Indah plant to address capacity issue

• F&N to achieve its total export revenue target before 2020

• Facing intense competition in Malaysia and Thailand

• Upgrade to NEUTRAL with a new target price of RM34.52

Pulau Indah plant is expected to double its annual capacity. We visited F&N Dairies Manufacturing plant in Selangor Halal Hub, Pulau Indah, Port Klang. With utilisation rate at near full capacity, the plant is currently producing close to 13.0 million and 3.0 million cartons of sweetened condensed milk and evaporated milk per annum respectively. To address the capacity issue, the plant is undergoing debottlenecking programme with capital expenditure in excess of RM25.0m. F&N expects to double the plant annual capacity gradually by 2020 to cater for strong export demand.

F&N to achieve its total export revenue target before 2020. The afore-mentioned planned capacity expansion is mainly to support the strong export growth. F&N targets total export revenue to reach RM800.0m by 2020. For the 9MFY18, revenue from export contributed approximately 16.0% of total revenue. As of 9MFY18, export contributes 16.0% of total revenue whilst for F&N Malaysia and Thailand segment grew +20.0%yoy and +10.0%yoy respectively. We estimated export revenue to contribute between the range of RM642.9m to RM710.6m for FY18. Assuming the same rate of growth, F&N poised to achieve its total export revenue target before 2020.

Facing temporary challenges in Malaysia and Thailand market. F&N’s two main segments i.e. the Malaysian and Thailand segments which contribute 57.1% and 42.9% respectively to total revenue (including export) are currently facing intense completion. For instance, F&N’s domestic market share for sweetened condensed milk has slipped from 59.0% in FY14 to 52.4% as of 1HFY18. Despite the declining market share, revenue dropped marginally by -0.4%yoy and -0.3%yoy in the 9MFY18. Nevertheless, we expect a stronger revenue growth due to: (i) pre-SST purchase and; (ii) new innovative products set to be launched in Malaysia and Thailand market next year.

Upgrade to NEUTRAL stance with a revised TP of RM34.52. We upgrading our target price to RM34.52 (previously RM28.30) which is based on FY19F EPS of 132.8sen pegging it to a target PER of 26.0x (previously 21.3x). We upgrade our valuation to a PER of 26.0x the five-year historical average. Our upgrade is premised on the expectation that future earnings growth will be driven by the: (i) continued strong export growth; and (ii) improved cost efficiency as a result of cost optimisation efforts and better economies of scale. In addition, we expect that the challenging domestic market conditions for both Malaysian and Thailand segment to be short-lived as: (i) stronger consumer sentiment going forward will spur more buying activity; and (ii) new innovative products set to be launched in Malaysia and Thailand market next year will regain some of the loss market share.

Source: MIDF Research - 16 Aug 2018