Review

• Fraser & Neave Holdings Berhad’s (F&N) FY19 adjusted net profit of RM426.9mn (+6.2% YoY) came below our expectation though within consensus estimate at 93% and 99% respectively. The variance was largely due to lower-than-expected F&B Thai revenue and higher-than-expected effective tax rate.

• The group declared a final single-tier dividend of 33.0sen/share in 4QFY19, bringing the total dividend for the year to 60.0sen/share (vs. 57.5sen/share in FY18).

• FY19 revenue increased by 5.3% YoY largely underpinned by growth in F&B Thailand, which revenue grew by 11.3% YoY. The improvement was driven by: i) strong sales momentum, ii) successful marketing and branding initiatives, and iii) optimal pricing structure. Meanwhile, F&B Malaysia recorded a marginal revenue improvement of 0.5% YoY, owing to higher sales of value pack product types and trade spending, although was partly dragged by absence of a one-off export-oriented contract.

• FY19 operating profit, jumped by 23.4% YoY to RM520.4mn, driven by F&B Thailand’s (+40.3% YoY) operations. The improvement was mainly result of favourable input costs and greater operational efficiency. Overall, EBIT margin improved to 12.8% (+1.9 pts YoY). The effective tax rate was 14.2%-pts higher YoY (at 23.0%, due to the lapse in F&B Thailand’s tax incentives), resulting to a flat net margin (10.1%; +0.1%-pts YoY).

• YoY against 4QFY18. 4QFY19 operating profit was 13.6% YoY lower despite 2.9% YoY increase in revenue (to RM975.1mn). Profit from F&B Malaysia decreased 27.0% YoY largely due to i) presence of sales tax refund and rebranding support fund amounting a total of RM8.7mn in 4QFY18. As for F&B Thai, operating income was lower by 1.8% YoY due to group’s heightened brand investment and trade spending associated to new product launches.

Impact

• We make no changes to earnings forecast. Note that an analyst briefing would be conducted today.

Outlook

• The group is expected to prioritise its commercial execution in preparation for an early 2020 Chinese New Year festive sales, accelerate product innovations, and enhance operational efficiencies alongside expanding its global reach through new market expansion and ecommerce penetration.

• The group’s mission in lowering overall sugar index has been fruitful where 90% of ready-to-drink beverages sold in Malaysia now contain less sugar than the excise duty threshold. Moreover, with strong consumer acceptability toward the reduced sugar products, we are not overly concern with beverage segment despite some wait-and-see stances adopted by retailers in the latest quarter.

• With regards to the volatile input cost, we are hopeful that the group’s proactive management of its procurement and optimal pricing could mitigate any sharp unfavourable raw material price movements.

• We believe the group’s business direction for vertical integration would lead to meaningful results in the medium term.

Valuation

• Maintain Buy on F&N with unchanged target price of RM42.00/share.

Source: TA Research - 6 Nov 2019