• Fraser and Neave Berhad’s (F&N) 1QFY17 net profit came in within ours and consensus estimates at 29% and 25% of full-year earnings respectively. After removing exceptional FX items of RM24.9mn, 1QFY17 earnings reduced by 49.6% YoY to RM102.4mn as compared to RM203.2mn in 1QFY16 due to additional costs incurred on organisational restructuring.

• F&N’s revenue improved by 2.0% to RM1.09bn for 1QFY17. This was mainly derived from increased revenue contribution from F&B Malaysia and F&B Thailand of 1.1% and 3.6% respectively. This was despite continuing competitive price pressure and weak consumer sentiment in Malaysia. Meanwhile, the weakening of ringgit against Thai Bath resulted in higher sales from F&B Thailand.

• Despite higher revenue, 1QFY17 operating profit declined by 16.5% to RM141.9mn as compared to RM169.9mn in 1QFY16. The decline was mainly attributable to reduction in F&B Malaysia’s operating profit of 26.1% due to higher raw material costs (i.e. sugar), organisational restructuring costs and higher marketing expenses. On the other hand, F&B Thailand’s operating profit improved by 17.3% due to favourable milkbased commodity costs and tax recovery. Overall, 1QFY17 operating profit margin declined by 2.89 ppt YoY to 13.0%.

• No dividend was declared for the quarter under review.

Impact

• No change in our earnings forecast.

Outlook

• Management guided that the coming quarters are expected to be challenging due to increasing commodity prices (sugar, milk, whey powder, aluminium and soy) coupled with weakening of Ringgit.

• Despite higher profit from F&B Thailand, FY17 profit is expected to be dragged down by higher operating costs in association with organisational restructuring and increasing marketing activities.

Valuation

• Target price is maintained at RM21.63/share based on unchanged 21x CY17 EPS. Maintain Sell call on the company as valuation is running ahead of company’s fundamentals.

Source: TA Research - 8 Feb 2017