INVESTMENT HIGHLIGHTS

• 1QFY19 earnings improved by +15.0%yoy to RM122.9m, in-line with ours and consensus expectations

• F&B Malaysia managed to record third consecutive quarter of positive operating profit growth

• Despite registering similar operating profit growth, F&B Thailand performance was dragged by higher tax expense

• Maintain NEUTRAL with an adjusted TP of RM33.78

Earnings within expectations. Fraser & Neave Holdings Bhd’s (F&N) normalised earnings for 1QFY19 came in higher by +15.0% to RM122.9m. This accounted for about 28.0% of ours and consensus full year FY19 earnings forecast. The strong quarterly earnings is within our expectation as historically, the group first quarter result range between 25.0% to 40.0% in the last three years.

F&B Malaysia regained stability post-transformation exercise. F&B Malaysia segment’s normalised operating profit for the 1QFY19 increased by +33.8%yoy to RM154.1m. Post-transformation exercise, the segment managed to record third consecutive quarter of positive growth albeit at a moderating pace. The strong performance was mainly due to the: (i) earlier Chinese New Year festive sell-in for beverage products coupled with lower discount and; (ii) favourable input cost for sugar, palm oil and dairy-based commodity. However, these are partly offset by the higher packaging material costs.

Higher tax expense dragged F&B Thailand performance. Similarly, F&B Thailand 1QFY19 normalised operating profit rose by +36.5%yoy to RM72.7m. This is mainly driven by the: (i) higher export revenue from market expansion and execution of promotional campaigns in the Indochina region such as Cambodia and Laos as well as; (iii) favourable raw material costs. Nonetheless, F&B Thailand has commenced paying corporate taxes starting this quarter as it has fully utilised the promotional tax incentive awarded by the Board of Investment.

Target Price. We adjust our target price to RM33.78 (previously RM31.54) as we rolled forward our valuation based to FY20F pegging its FY20 EPS of 129.9sen to unchanged PER of 26.0x which its fiveyear historical average.

Source: MIDF Research - 4 Feb 2019