F&N dampened by dairy, property

Fraser & Neave Holdings Bhd (F&N)
(May 10, RM10.82)
Maintain underperform at RM10.72 with target price RM8.65: F&N 2QFY9/10 net profit of RM85 million took 1H bottom line to RM163 million, which works out to 58% of our full-year forecast and 60% of consensus estimate. It is broadly in line with expectations as we anticipate a less robust 3Q in the absence of major festivities.

The interim dividend per share (DPS) of 18 sen gross and three sen tax-exempt was also not surprising. We maintain our forecasts, discounted cash flow-based target price of RM8.65 (weighted average cost of capital unchanged at 8.4%) and underperform recommendation.

The potential derating catalysts are further declines in the dairy and property businesses, and margin pressure from trade discounting. F&N is undoubtedly a venerable company, and trails behind QSR Brands, Cocoaland and CI Holdings, whose valuations are more attractive. QSR is our top food and beverage pick.

F&N’s 2Q sales surged to a record RM1 billion, helped by strong festive soft drinks sales, which improved 15% year-on-year (y-o-y). All main products registered growth, with Coca-Cola and 100Plus again outshining the rest. Furthermore, the glass business sprang a nice surprise, chalking up a 14% y-o-y jump in sales volume in Vietnam and Thailand after a string of disappointing quarters.

However, the exciting growth recorded by the soft drinks and glass businesses was offset by the slowdown of dairy and property activities. Revenue for the dairy business stagnated as higher sales in Malaysia and Thailand/Indochina were offset by lower exports. The property business is expected to remain sluggish as no significant new projects are in the offing.

F&N has sealed an exclusive five-year agreement effective April 1 to distribute Red Bull energy drinks in Malaysia. The deal will expand F&N’s product portfolio and help fill the sales void that Coca Cola and Sprite will leave behind when its transitional bottler’s and distributor’s agreements expire on Sept 30, 2011. — CIMB Research, May 7