We came away from Fraser & Neave Holdings (F&N) result briefing, feeling positive about the company outlook in FY24. The key takeaways from the briefing are as follows:

i) Prioritise volume growth in FY24; ii) Accelerating CAPEX for greater goods; iii) Integrated food manufacturing hub for Sri Nona & Cocoaland; and iv) Continue innovate on sustainability matters.

We downgrade F&N to Hold despite a higher DDM-driven target price at RM30.00/share in view of recent strength in share price.

Prioritise Volume Growth in FY24

Despite the substantial growth in FY23 revenue and core earnings of 11.9% and 22.9%, respectively, the sales volume has not yet fully recovered to pre-pandemic levels, primarily due to a 5% average price adjustment made across the board in 2022. The slower-than-expected volume recovery can be attributed to the delayed return of tourists and the inflationary pressures resulting from the surge in interest rates during CY23.

Nevertheless, the company has guided that export sales (which constitute 21% of the group's revenue) are expected to maintain its growth trajectory thanks to favorable forex translation and persistent marketing strategies aimed at effectively penetrating foreign markets, including ASEAN regions, China, South Africa, and others. We also gather that no immediate price adjustments will be implemented as the near-term cost pressure is manageable. Instead, the company will prioritize efforts to boost sales volume, capitalizing on the gradual return of tourists and resilient consumer spending, while continuing to monitor costs efficiently.

Following the completion of the CAPEX items outlined in the table above, F&N has set its sights on raising RM1.3bn via internally-generated funds and an upcoming bond issuance, which will be earmarked for the development of its new dairy farm in Ladang Permai Damai. The company is on track to achieve its Phase 1 goal of commencing the first milking by early-2025. To note. as of

September 2023, c.500 acres of land have been cleared in preparation for the arrival of the first batch of 2,000 imported milk cows, expected by the 1HFY24. F&N aims to produce 100mn litres of fresh milk annually with a total of 4,000 milk cows for Phase 1.

However, despite the company's optimism and ambitious plans, we maintain a cautious stance on the new dairy farming project, as production yield may be subject to factors such as feed quality and the adaptability of cow breeds to the tropical climate in Malaysia, which could take time. Additionally, the substantial upfront CAPEX allocation suggests a longer payback period. Therefore, we anticipate that the new dairy farm will only significantly contributing the group's bottom line in the 2HFY26.

Integrated Food Manufacturing Hub for Sri Nona & Cocoaland

F&N is set to integrate Cocoaland's current facility in Rawang, which will serve as the central hub for the production of Sri Nona and Cocoaland's products. To recap, F&N's Malaysia division is responsible for the distribution of Sri Nona's products in 2023, making use of its existing logistics network and systems. We anticipate that this move will strategically bolster the group's production capacity and, at the same time, ensure the efficiency of logistics and operations, ultimately delivering increased synergistic value.

Continue Innovate on Sustainability Matters

The company is poised to continue its effort in ESG segments by installing solar photovoltaic panels at 5 locations:

1 Shah Alam –Main Parking, CDE Warehouse & CDEW Parking 1,542

2 Lot 88, Rawang 1,636

3 Lot 10, Rawang 1,165

4 FNDM Pulau Indah – Warehouse, Admin Block, Carpark Roof 1,488

5 Lot 28, Rawang 553

The installations, which cost RM19mn, are expected to yield a good return and offset the rising utility cost. This initiative is in line with the group's sustainability objectives, aimed at reducing greenhouse gas (GHG) emission intensity by 8% at its plants by 2025.

Forecast

We adjust our FY24/25/26F earnings forecast upward by 16.3%/16%/14.5%, respectively, as a reflection of positive sales outlook amid market penetration to ASEAN regions.

Valuation

We downgrade to Hold despite a higher DDM-driven target price of RM30.00/share (previously RM29.70/share) given the recent strength in the share price (k: 6.3%; g: 3.0%).

Source: TA Research - 9 Nov 2023