F&N's 1QFY25 results met expectations, with core net profit (adjusted for forex) down 10% YoY mainly due to higher taxes from Thailand, despite a 17% surge in EBIT driven by stronger festive and tourism demand, improved sales mix and lower input costs. While we remain positive on F&N's growth prospects amidst rising tourism in Malaysia and Thailand, we trim our FY25- 26F earnings by 5-7% to account for higher tax assumptions, and lower our TP to RM34.40 (from RM36.30). However, we reiterate our OUTPERFORM call, as the recent share price weakness presents a buying opportunity, with valuations near 1SD below its 5-year historical one-year forward PER mean.

Within expectations. F&N's 1QFY25 core net profit, adjusted for forex, of RM152m came in within expectations, at 25% of our full-year forecast and 26% of the full-year consensus estimate. As expected, no dividend was declared during this quarter. For the full financial year, we expect the group to declare a total dividend of 75 sen, implying a dividend payout ratio of 47%.

YoY, its 1QFY25 revenue climbed 4% driven mainly by a 9% growth in F&B Thailand, supported by: (i) recovery in the Thai economy with increased tourist arrivals, and (ii) stronger Indochina sales from fresh milk supply restoration. Revenue from F&B Malaysia edged up 1% YoY due to early festive sell-in for Chinese New Year (CNY). EBIT increased by a sharper 17%, benefitting from better sales mix and lower input costs (favourable sugar prices, partially offset by higher palm oil costs).

However, core net profit fell 10% due to higher taxes following the tax incentive expiration for F&B Thailand since 3QFY24 and withholding taxes on dividends repatriated from Thailand.

QoQ, its 1QFY25 turnover rose 11% thanks to early festive demand in Malaysia, as well as sustained recovery in the Thailand and Indochina markets. Its core net profit surged 35% due to lower input costs and improved economies of scale.

Outlook. We believe F&N may continue to benefit from rising tourism in Malaysia and Thailand, especially with its ready-to-drink beverages. We also like its strategic focus on high-growth halal packaged food and dairy segments. The construction of the integrated dairy farm in Gemas remains on track and advancing steadily, though the delivery of first batch of livestock has been delayed since end-2024.

As highlighted in our previous report, our preliminary estimates suggest that if Phase 1 launches by FY26, there could be an indicated capacity of 100m litres. At the lower range of current market price as indicated by management of RM8-15/litre and an 8% pre-tax margin (per listed peers), we believe PATAMI potential could reach RM49m annually, implying an 8% earnings upside in FY26, and fair valuation, all else equal. For now, we have not incorporated this due to execution and timing risk of getting production started. Prior to production, there would mainly be cash outflow risk. Outlays in start-up costs for this quarter were not disclosed (FY24: RM17m).

Forecasts. We cut our FY25-26F earnings by 5-7% to reflect higher tax assumptions. Notably, the minimum wage increase (effective Feb 2025) and sugar tax hike (effective Jan 2025) are expected to have only minimal impact on its costs (c.1% of profit).

Valuations. We also lower our TP by 5% to RM34.40 (from RM36.30), while keeping an unchanged 22x FY25F PER, consistent with the industry's average forward PER. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

Investment case. We continue to like F&N for: (i) its defensive earnings given the stable demand for essential food items despite high inflation and an uncertain global economic outlook, (ii) the rising popularity of ready-to-drink products where F&N has a strong presence, (iii) proxy to the recovery of domestic consumption and the return of tourists in Thailand, and (iv) its long-term growth prospects driven by its investment in a sizeable dairy farm in Gemas, Negeri Sembilan. We believe the recent share price weakness presents an accumulation opportunity, as valuations appear attractive, currently trading near 1SD below its 5-year historical one-year forward PER mean. Maintain OUTPERFORM.

Risks to our call include: (i) an uptick in food commodity prices, (ii) sustained high inflation eating into consumer spending power, (iii) downtrading by consumers i.e. opting for more affordable alternatives, and (iv) unforeseen and sustained delays in starting the dairy business.

Source: Kenanga Research - 4 Feb 2025