KEY INVESTMENT HIGHLIGHTS

• Thailand strong operational performance in FY19 was eroded by higher tax

• We expect the higher effective tax rate of approximately 23.0% could be the new norm going forward

• The new dairy farming venture provides a better long term prospect for F&N local operation

• Maintain NEUTRAL with a revised TP of RM31.59

Strong operational profit eroded by a higher tax. To recall, Fraser & Neave Holdings Bhd’s (F&N) operating profit for FY19 rose by +23.4%yoy to RM520.4m driven by F&B Thailand solid performance (FY19 operating profit recorded higher by +49.7%yoy). However, normalised earnings growth was only +6.0%yoy (RM406.2m). This was due to effective tax rate rising to 23.0% (vs 8.9%) as its Thailand operation had fully utilised tax incentives granted by Thailand Board of Investment. We gather that management is in the midst of applying for new tax incentives there. Nonetheless, we believe this will not significantly lower the effective tax rate as more than 75% of the RM450.0m total capital expenditure in FY20 will be directed to investment in its Malaysian operation.

New dairy farming venture take time to come to fruition. F&B Malaysia continue to face pressure amidst the continuous intense competition in the canned milk and ready-to-drink (RTD) segments. This translated into an inferior performance relative to its Thailand operation (operating profit marginally higher by +2.4%yoy). Therefore, we believe that the new dairy farming project could give the local operation a much needed boost in terms of earnings sustainability. Nonetheless, we understand that venturing into dairy farming is not an easy feat given failures of similar projects undertaken by other parties in the past. With careful planning, we estimate that the dairy farming project could take at least five years before it can give a meaningful profit contribution to the group.

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

Target price. Our target price remain unchanged at RM31.59 based on FY20F EPS of 121.5sen to unchanged PER of 26.0x which is its fiveyear historical average.

Maintain NEUTRAL. We believe that the group’s earnings will continue to grow, driven by the better prospect for F&B Thailand following the aggressive investment in brand spending and new product launches. We also believe the segment has plenty of room for expansion given the relatively bigger market size. Meanwhile, the near-term outlook for F&B Malaysia remain challenging in view of competitive price pressures and intensifying competition especially in the canned milk and beverage segment. Nonetheless, its latest dairy farming project could revive the segment long-term outlook as it will provide the group with capability to insource the supply of fresh milk to support existing downstream production and distribution of fresh milk products. As the project is still at its infancy stage and the land acquisition at Ladang Chuping, Perlis has yet to be finalised, we expect no meaningful contribution in the near to midterm. All things considered, we maintain our NEUTRAL call on the stock

Source: MIDF Research - 7 Nov 2019