Stock Name: F&N
Company Name: FRASER & NEAVE HOLDINGS BHD
Research House: AMMB
Fraser & Neave Holdings Bhd
(July 19, RM14.22)
Maintain buy at RM14.20 with fair value of RM15.20: The government has announced subsidy cuts for sugar, petrol, diesel and liquefied petroleum gas (LPG) as part of its gradual subsidy rationalisation programme.
With the upward adjustment of 25 sen/kg (+15%) for sugar, the effective retail price of coarse sugar is now RM1.90/kg in Peninsular Malaysia and RM2/kg in Sabah & Sarawak, compared with RM1.65/kg and RM1.75/kg previously.
While this development does not bode well for most F&B companies in general, we are not surprised by the move given the government's intention to reduce subsidies. Recall, the sugar price was raised by 20sen/kg in January 2010.
We see insignificant impact on F&N's earnings; more than 2% of FY2010F core earnings, assuming one or two months time lag in passing down costs. While sugar is one of the main ingredients in F&N's soft drinks and dairy products, such as condensed and evaporated milk, it makes up only 10% to 12% of total operating costs. Almost 50%, or the bulk of total operating costs, come from packaging materials such as aluminium and PET (polyethylene terephthalate plastics).
We reckon the group will be able to pass down the additional costs to consumers by increasing the prices of its products with relative ease, judging from previous experience and its strong brand equity. Furthermore, with almost 80% of its products retailing under the RM3 mark, we do not think the small quantum of increase will deter consumption.
The group has been shifting its focus toward production of beverages with a lower sugar content and over the last five years has reduced the average amount of sugar by 7.5% in its products.
No change to our earnings forecast and buy recommendation with fair value of RM15.20 per share, based on target PER of 18 times CY2011F earnings. We expect further upside arising from a possible earnings accretive M&A, while the strong fundamentals of core soft drinks and dairies should continue to fuel positive investor interest. 'AmResearch Sdn Bhd, July 16
This article appeared in The Edge Financial Daily, July 20, 2010.
Company Name: FRASER & NEAVE HOLDINGS BHD
Research House: AMMB
Fraser & Neave Holdings Bhd
(July 19, RM14.22)
Maintain buy at RM14.20 with fair value of RM15.20: The government has announced subsidy cuts for sugar, petrol, diesel and liquefied petroleum gas (LPG) as part of its gradual subsidy rationalisation programme.
With the upward adjustment of 25 sen/kg (+15%) for sugar, the effective retail price of coarse sugar is now RM1.90/kg in Peninsular Malaysia and RM2/kg in Sabah & Sarawak, compared with RM1.65/kg and RM1.75/kg previously.
While this development does not bode well for most F&B companies in general, we are not surprised by the move given the government's intention to reduce subsidies. Recall, the sugar price was raised by 20sen/kg in January 2010.
We see insignificant impact on F&N's earnings; more than 2% of FY2010F core earnings, assuming one or two months time lag in passing down costs. While sugar is one of the main ingredients in F&N's soft drinks and dairy products, such as condensed and evaporated milk, it makes up only 10% to 12% of total operating costs. Almost 50%, or the bulk of total operating costs, come from packaging materials such as aluminium and PET (polyethylene terephthalate plastics).
We reckon the group will be able to pass down the additional costs to consumers by increasing the prices of its products with relative ease, judging from previous experience and its strong brand equity. Furthermore, with almost 80% of its products retailing under the RM3 mark, we do not think the small quantum of increase will deter consumption.
The group has been shifting its focus toward production of beverages with a lower sugar content and over the last five years has reduced the average amount of sugar by 7.5% in its products.
No change to our earnings forecast and buy recommendation with fair value of RM15.20 per share, based on target PER of 18 times CY2011F earnings. We expect further upside arising from a possible earnings accretive M&A, while the strong fundamentals of core soft drinks and dairies should continue to fuel positive investor interest. 'AmResearch Sdn Bhd, July 16
This article appeared in The Edge Financial Daily, July 20, 2010.
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