KEY INVESTMENT HIGHLIGHTS

• 4QFY19 normalised earnings came in at RM71.5m which lagged our and consensus expectation

• F&B Malaysia segment impacted by lower sales volume post sugar tax implementation

• F&B Thailand segment sales was lowered as competition in sterilised milk products intensifies

• Final dividend declared of 33.0sen per share

• Maintain NEUTRAL with a revised TP of RM31.59

4QFY19 normalised earnings dropped by -3.3%yoy. Fraser & Neave Holdings Bhd’s (F&N) normalised earnings for 4QFY19 came in lower by -3.3%yoy to RM71.5m. Cumulatively, the FY19 normalised earnings registered at RM406.2m (+6.0%yoy) which is lower than ours and consensus expectations, accounting for 91.3% and 94.1% of full year FY19 earnings forecasts respectively. Contrary to our expectation, F&B Thailand segment reported a decline in operating profit during the quarter driven by intense competition in the sterilised milk segment.

Poor performance by F&B Malaysia segment. The F&B Malaysia segment operating profit for the 4QFY19 declined by -27.0%yoy to RM27.7m. The subdued performance was mainly due to the: (i) retailers adopt a wait-and-see stance following the pre-loading of products in the previous quarter ahead sugar tax implementation on the 1st of July 2019; (ii) expenses related to employee separation benefits and equipment written off and; (iii) absence of sales tax refund received in the corresponding quarter last year.

F&B Thailand recorded lower sales in local currency term. Meanwhile, F&B Thailand registered a decline in 4QFY19 sales by - 0.8%yoy in local currency terms due to higher competition in the sterilised milk products. However, thanks to a favourable MYR vs THB forex translation, revenue for the segment rose by +7.7%yoy. Nonetheless, operating profit was lower by -1.8%yoy in view of the higher brand investment and trade spending for new product launches.

Final dividend declared of 33.0sen per share. Final dividend declared of 33.0sen per share for FY19 (vs FY18 of 30.5sen). Cumulatively, dividend declared for FY19 is of 60.0sen per share (vs FY18 of 57.5sen).

Impact to earnings. We are revising our FY20F downward by -6.5% as we input a lower sales volume for F&B Thailand.

Target price. We are revising our target price to RM31.59 (previously RM33.78) based on FY20F EPS of 121.5sen to unchanged PER of 26.0x which its five-year historical average.

Maintain NEUTRAL. The outlook for F&B Malaysia remains challenging in view of competitive price pressures and intensifying competition especially in the canned milk and beverage segment. 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 brand investment and trade spending for new products will solidify its brand presence. All things considered, we maintain our NEUTRAL call on the stock.

Source: MIDF Research - 6 Nov 2019