INVESTMENT HIGHLIGHTS

• 3QFY19 normalised earnings rose by +10.9%yoy to RM112.6m, within ours and consensus expectations

• F&B Malaysia performance lifted by Hari Raya and Pesta Kaamatan celebration

• Thailand’s operations continued its strong growth momentum

• Maintain NEUTRAL with an adjusted TP of RM33.78

Earnings within expectations. Fraser & Neave Holdings Bhd’s (F&N) normalised earnings for 3QFY19 came in higher by +10.9%yoy to RM112.6m. Cumulatively, the 9MFY19 normalised earnings came in within ours and consensus expectations which accounted for 75.2% and 78.6% of full year FY19 earnings forecasts respectively.

F&B Malaysia performance lifted by festive period. The F&B Malaysia segment normalised operating profit for the 3QFY19 rose by +7.3%yoy to RM52.7m. The commendable performance was mainly due to the: (i) higher sales volume attributed to the Hari Raya and Pesta Kaamatan (Harvest festival); (ii) improved in canned milk revenue despite continuing price competition and; (iii) favourable refined sugar cost. These are partly offset by the lower export revenue from the Malaysian operation due to the absence of a one-off contract packing business.

F&B Thailand continued its strong growth momentum. Meanwhile, F&B Thailand registered a similar strong performance as the previous quarter. For 3QFY19, its normalised operating profit rose significantly by +68.7%yoy to RM96.8m due to the: i) higher domestic and export revenue particularly from the Indochina market; (ii) favourable raw material costs and; (iii) translation gain arising from weaker Thai Baht to Ringgit.

The group incurred a significantly higher tax expense. The effective tax rate for the group jumped to 26.1% in 3QFY19 (from 2.4% in 3QFY18). The tax expense for the quarter is higher as F&B Thailand has commenced paying corporate taxes following the full utilisation of its promotional privileges. In addition, the group incurred a lower tax expense in 3QFY18 due to the significant reversal of over provision of income and deferred tax in prior years.

Impact to earnings forecast. We maintain our earnings forecast at this juncture.

Target Price. Our target price remain unchanged at RM33.78 based on FY20 EPS of 129.9sen to unchanged PER of 26.0x which its five-year historical average.

Maintain NEUTRAL. The outlook for F&B Malaysia remain challenging in view of competitive price pressures and intensifying competition especially in the canned milk segment as well as the beverage segment due to the impact of the sugar sweetened beverages excise duty effective from 1st July 2019. Nonetheless, we believe that the group’s earnings growth will continue to grow, driven by the better prospect for F&B Thailand following the improvement in both sweetened condensed and evaporated milk segments. We believe the segment has plenty of room for advancement given the huge market. Furthermore, the management effort to continue investing in advertising and promotions will solidify its brand presence. All things considered, we maintain our NEUTRAL call on the stock.

Source: MIDF Research - 7 Aug 2019