KEY INVESTMENT HIGHLIGHTS

• Reinvesting in production and warehousing facilities

• Product range expansion to diversify income stream

• Continue to strengthen export sales

• Manage cost to protect margins

• Maintain NEUTRAL with an unchanged TP of RM31.48

Looking beyond the pandemic period. We attended Fraser & Neave Holdings Bhd (F&N) briefing taking away a few main points that include how the management looks to grow the company beyond the pandemic. Among others, it is planning for the 2021 Chinese New Year “as normal”. We notice the optimistic tone of the management in overcoming the challenges brought about by the pandemic while acknowledging that development is still fluid.

Reinvesting into its production and warehousing facilities. One of the main key takeaways is that the company will continue to reinvest in the business and that includes its brands and manufacturing capabilities. Its RM78m integrated warehouse in Shah Alam with automatic storage and retrieval system (ASRS) and a capacity of 50,000 pallets is scheduled to be operational by mid of 2021. It is also setting up a new regional distribution centre in Rojana, Thailand equipped with ASRS, which is expected to be operational in 2021. The cost is estimated at RM57m for the new distribution centre. The new warehouse is expected to further enhance its operational and cost efficiency. As for its solar initiative, the solar photovoltaic system at its Rojana Plant has been commissioned since April, with a 1MWp capacity. In Malaysia, it is allocating RM30m over two years to install solar panels at its manufacturing facilities in Shah Alam, Pulau Indah and Bentong. The combined solar energy capacity is estimated at 10MWp. Meanwhile, its chilled production facility at its Pulau Indah plant is also completed. The chilled facility is part of its RM40m investment in Pulau Indah to support its health and wellness segment. In Sabah, the construction of its drinking water production plant and warehouse at the Kota Kinabalu Industrial Park is on-going.

Continue to strengthen export sales. Export sales now make up 20% of F&N’s total sales compared to 17.9% in 2019. The company is exporting to 82 countries around the world. It hopes to use the office in Dubai to springboard into the regional market there. Meanwhile, revenue from halal markets such as the Middle East, West and North Africa, and Indonesia has exceeded RM100m. We think that the geographical diversification for the group will be beneficial to the company as sales can be cushioned by other markets in case there is softening in its main markets name Malaysia and Thailand. For instance, the exports to IndoChina market has lifted sales for Thailand F&B.

Product range expansion to diversify income stream. The company has been expanding its offerings to adjacent product categories such as the squeeze tubes for bread spread, healthier drinks options, zero or low sugar variants. The new products that may capture new consumer groups may also be creating awareness on its existing products. An example is its Magnolia Milkies milk tablets, which are placed at highly visible shelves or at the counters, creates brand awareness for its other Magnolia dairy products. Entering 2021, we opine that the company will continue to build on the momentum of the products launched in 2020 such as Sunkist Pure Juice Drink, F&N ready-to-drink Teh Tarik Ori, 100PLUS Zero, F&N Ice Mountain Sparkling Water and OYOSHI Gold No Sugar Premium Japanese Green Tea to gain more mass. We believe that having a higher volume for the existing products will be more beneficial than increasing the number of new products.

Online sales recorded about RM5m. Other than its own F&N Life platform, which was launched in January, the company is also working with other e-commerce platforms such as Lazada, Shopee, TMALL and JD to promote its products. Although the revenue from online is considerably small at the moment, we believe that the potential to grow this segment is huge as more consumers have shifted to online to purchase their groceries and essentials. Going forward, the company will focus on enhancing its distribution methods, including the delivery of products to the end consumers. We also opine marketing and promotional activities are increasingly shifted online as end consumers increasingly consume digital content. With a more comprehensive online strategy, we think that F&N will be able to market and promote its products better.

Manage costs to protect margins. Skimmed milk powder prices have increased by about 10% since August. On top of hedging raw material prices, the company continues to improve on its packaging to save costs. Besides controlling costs, we also note that the company has rolled out premium, convenient and healthier products, which are usually priced higher. We believe that these new products will be able to garner better margins. On another note, its solar power projects are also expected to save utilities cost in the long run on top of being more environmentally friendly. We believe that the management will be able to control costs effectively given its experience and track record.

Maintain NEUTRAL with an unchanged TP of RM31.48. We believe that the company is likely to see recovery into 2021 but we take note of the subdue consumer sentiment and possibly weaker festivity mood in the near-term, which may dampen sales. As such, we maintain our NEUTRAL recommendation on the stock. We make no changes to our earnings estimates post briefing. Our TP is based on PER of 26.0x pegged to FY21F EPS of 121.1sen. The PER ascribed is based on its 5-year historical mean. Dividend yield is estimated at 1.9%.

Source: MIDF Research - 5 Nov 2020