We attended Fraser & Neave Holdings Berhad (F&N)'s post-result briefing last Friday and felt optimistic about the group's outlook.

The key takeaways from the briefing are as follows:
i) Key raw material costs turn favourable
ii) Dairy farming remains on track
iii) Strengthening its presence in Cambodia

We maintain a Hold recommendation on F&N with a revised target price of RM34.50/share based on the DDM valuation approach.

Key Raw Material Costs Turn Favourable

The reduction in raw material prices was one of the key drivers that led to the better 2QFY24 performance. Nevertheless, the rising costs of raw materials such as sugar, rice, gelatin, and cocoa powder will continue to pose challenges to the group's bottom line. In terms of impact, sugar, which peaked in FY23, is estimated to affect the group by RM60mn as it serves as the primary raw material of the group. Meanwhile, the recent surge in cocoa and gelatin prices is expected to have minor impacts on the group, with estimated amounts of RM4.0mn and RM5.0mn, respectively. We believe that FY24 production will remain supported, given that cocoa powder is judiciously used in certain Cocoaland's products (Cocoa Pie and Cocoa Jelly). The group still has a bit of leftover inventory for gelatin that is locked in at low prices. As such, we expect the group to sustain its gross profit margin for 2HFY24 at the current level, approximately 31%. Consequently, there are no intentions for price adjustment in 2HFY24, as management believes that any price hikes can be mitigated through effective cost management control.

Dairy Farming Remains on Track

For its dairy farming, the importation of 2,000 pregnant heifers (USA Holstein Cows) in phase 1 is proceeding as planned. According to management, the cows take approximately seven months (gestation period) to give birth to a calf. The group anticipates a milk yield of 30 litres/day for each milking cow. However, the yield may be affected by the cows' adaptability to the hot and humid weather in Malaysia. Therefore, the group aims to reach a production of 100mn litres/annum for phase 1. The first milking is scheduled for early 2025. A capex of RM1.7bn (phase 1) for dairy farming is slated within the next 3 to 6 months. This funding will be sourced from a combination of internally generated funds and borrowings. Moreover, F&N targets to break even within three years, by no later than FY27, to begin realising contributions from the dairy farming venture.

Strengthening Its Presence in Cambodia

The group has incorporated a subsidiary in Cambodia to strengthen its dairy products segment. F&N has leased a piece of land in the Suvannaphum Special Economic Zone to set up a dairy product manufacturing facility, with a total cost (including land lease, construction, and machinery acquisition) of RM179.5mn. The new manufacturing facility is scheduled to begin its operations in 1QFY26. Initially, the group plans to produce sweetened milk at the new plant while continuing to import condensed milk from Thailand.

Impact

We adjust our FY24/25/26 earnings forecast upward by 15.0%/3.2%/3.4%, respectively, mainly after factoring in higher-than-expected 2QFY24 results and lowering our cost assumptions by 1.3%/1.5%/1.6% for FY24/25/26, respectively.

Valuation

We maintain a Hold on F&N with a revised target price of RM34.50/share (previously RM30.00/share) based on the DDM valuation approach (k: 6.3%; g: 3.0%) and rolled over base year to CY25.

Source: TA Research - 6 May 2024