KEY INVESTMENT HIGHLIGHTS

• Integrated dairy farm setback
• Expansion in Cambodia on track
• Minimal impact from sugary beverage excise duty
• Wage hikes to add cost pressure
• Cut FY25-27F core earnings
• Maintain BUY with a lower TP of RM36.77 (from RM40.47)

We attended F&N's FY24 analyst briefing, and we remain positive on the outlook for the company. Key highlights of the briefing as below:

Operational strength in Malaysia and Thailand. F&N Malaysia's revenue grew by +3.5%, driven by high festive sales, increased demand for beverages and dairy products, and enhanced export performance.

Cost efficiencies and effective marketing activities contributed to a +49%yoy surge in operating profit. Thailand also posted positive results, with a +6.7% revenue increase led by growing demand in Cambodia and favorable commodity prices.

Integrated dairy farm setback. The construction of F&N's integrated dairy farm in Gemas, Negeri Sembilan, part of the F&N AgriValley project, continues to progress. To ensure the highest standards of milk quality, F&N plans to grow much of the livestock feed in-house, particularly corn, which will offset the need for tens of thousands of tons of imported feed.

However, plans were delayed after the Malaysian Department of Veterinary Services suspended an import permit for high-performance breeding cattle from the U.S., which has pushed back the first milking originally scheduled for early 2025. F&N is actively working with partners to secure alternative cattle sourcing solutions to maintain progress. We remain positive about the farm's potential to support local milk supply but caution that the sourcing delay may take time to resolve. It is likely that full-scale operations could be pushed back by at least a year as F&N works to secure suitable livestock alternatives.

Expansion in Cambodia on track. F&N's strategic expansion into Southeast Asia includes the development of a new dairy manufacturing plant in Cambodia. Following a groundbreaking ceremony in September 2024, the plant is expected to be operational by 2026, further solidifying F&N's presence in the regional market. This facility will bolster F&N's dairy capabilities and support the growing demand for its products in Cambodia and surrounding markets.

Capital expenditure initiatives. In FY24, F&N continued investment in growth and operational efficiency, with major capital expenditure allocations across key projects. Investments include RM1.85b for Phase 1 of the integrated dairy farm in Gemas, along with the development of the Cambodia plant. Additionally, F&N is enhancing production capabilities with new carbonated beverage and water lines in Butterworth, a sterilized milk line in Pulau Indah, and a chocolate manufacturing line in Rawang.

Minimal impact from sugary beverage excise duty. Regarding the impact of excise duty on sugary beverages, F&N anticipates minimal disruption, as majority of its products meet regulatory thresholds. Only three products fall under the duty's scope, collectively representing a mere 1% of the group's total revenue.

Wage hikes to add cost pressure. The upcoming minimum wage increase in Malaysia, set to rise to RM1,700 in February 2025, presents an added cost challenge for F&N. Approximately 29% of the company's workforce will be affected by this wage hike, adding upward pressure to operating costs.

Revised earnings forecast for FY25-26F. Following the analyst briefing, we revised our earnings forecasts for FY25-27F downward by -9%. This adjustment accounts for the anticipated increase in wage-related costs from the minimum wage hike and incorporates updated tax assumptions for F&B Thailand following the expiration of tax incentives post-3QFY24.

Maintain BUY with a lower TP of RM36.77. Our revised TP is based on an unchanged PER of 22.5x to a lower FY25F EPS of 163.4sen. Despite this adjustment, we remain positive on F&N's growth prospects, driven by strong demand for out- of-home beverages, a resurgence in tourism across Thailand and Malaysia, and a shift in consumer preferences toward local brands. Expected declines in key input costs like sugar and pet resin are also set to support margin stability, while the integrated dairy farm in Malaysia will further enhance the group's self-sufficiency in the fresh milk market. As we enter 1QFY25, we expect seasonal consumer stockpiling for the holidays to provide a boost to revenue.

Valuation. F&N is currently trading at FY25F PER of 18.8x vs. its 5-year historical average 22.5x, while offering a dividend yield of 2.5% in FY25F. Downside risks are: (1) a further increase in commodity prices (tin plates, milk, palm oil, sugar, pet resin), and (2) fluctuation in currency rates (THB and USD).

Source: MIDF Research - 7 Nov 2024