Stock Name: F&N
Company Name: FRASER & NEAVE HOLDINGS BHD
Fraser & Neave Holdings Bhd
(Sept 14, RM16.30)
Maintain buy at RM16.50 with revised fair value of RM20.40 (from RM20.70): We re-affirm our 'buy' rating on Fraser & Neave (F&N), but have lowered our fair value from RM22.70 to RM20.40, after rolling forward our valuation base year to CY12F. We continue to peg revised earnings to a fair price-earnings ratio of 18 times ' at the top end of the stock's PER trading band, but at parity to the stock's historical discount to peer Nestle Malaysia Bhd (non-rated). Our fair value is further backed by our discounted cash flow value of RM20.88 (weighted average cost of capital: 9.6%, long-term growth: 2%).
End-September 2011 will mark a new era for F&N, as the transitional agreement with The Coca-Cola Co (TCCC) comes to an end. The expiry will effectively lift R&D and sales restrictions on cola and lemon-lime carbonated soft drinks for F&N; and isotonic and fruit-flavoured soft drinks for TCCC.
We remain positive about F&N's long-term earnings growth potential, driven by the core soft drinks and dairy divisions. Performance of the soft drinks division, which has seen new product line expansion and double-digit volume growth over the last 18 months, has been encouraging.
We understand sales volume of certain variants of tea (Seasons) and juice beverages (FruitTree) has outperformed internal management targets. To be sure, strong volume growth has been credited with partially offsetting the effects of the surge in sugar costs.
Additionally, dairy which contributes about 34% to group earnings before interest and tax (9MFY11) is expected to see higher earnings on the back of: (i) rising production volume at Rojana dairy plant on the back of higher exports to IndoChina countries; (ii) capacity boost from the upcoming Pulau Indah dairy manufacturing hub which should alleviate current local market supply constraints; and (iii) potential margin reprieve from softening skim milk powder (SMP) and whey prices ' major input costs for condensed milk and evaporated milk. As it is, NZ wholesale milk prices recently slumped 35% to a 13-month low on increased global supply from northern hemisphere producers.
We expect a stronger 4QFY11F, spurred by the Hari Raya Aidilfitri celebration to meet our full-year forecast. For FY12F, our revised earnings model indicates a marginal earnings contraction (-14% year-on-year) due to the absence of contribution from its property arm and partial earnings vacuum from the loss of the Coca-Cola contract. However, we view this as more of a transitory period, rather than terminal. We continue to like the stock for its strong earnings profile, market share leadership positioning and strong brand equity strength. ' AmResearch, Sept 14
This article appeared in The Edge Financial Daily, September 15, 2011.
Company Name: FRASER & NEAVE HOLDINGS BHD
| Research House: AMMB | Price Call: BUY | Target Price: 20.40 |
Fraser & Neave Holdings Bhd
(Sept 14, RM16.30)
Maintain buy at RM16.50 with revised fair value of RM20.40 (from RM20.70): We re-affirm our 'buy' rating on Fraser & Neave (F&N), but have lowered our fair value from RM22.70 to RM20.40, after rolling forward our valuation base year to CY12F. We continue to peg revised earnings to a fair price-earnings ratio of 18 times ' at the top end of the stock's PER trading band, but at parity to the stock's historical discount to peer Nestle Malaysia Bhd (non-rated). Our fair value is further backed by our discounted cash flow value of RM20.88 (weighted average cost of capital: 9.6%, long-term growth: 2%).
End-September 2011 will mark a new era for F&N, as the transitional agreement with The Coca-Cola Co (TCCC) comes to an end. The expiry will effectively lift R&D and sales restrictions on cola and lemon-lime carbonated soft drinks for F&N; and isotonic and fruit-flavoured soft drinks for TCCC.
We remain positive about F&N's long-term earnings growth potential, driven by the core soft drinks and dairy divisions. Performance of the soft drinks division, which has seen new product line expansion and double-digit volume growth over the last 18 months, has been encouraging.
We understand sales volume of certain variants of tea (Seasons) and juice beverages (FruitTree) has outperformed internal management targets. To be sure, strong volume growth has been credited with partially offsetting the effects of the surge in sugar costs.
Additionally, dairy which contributes about 34% to group earnings before interest and tax (9MFY11) is expected to see higher earnings on the back of: (i) rising production volume at Rojana dairy plant on the back of higher exports to IndoChina countries; (ii) capacity boost from the upcoming Pulau Indah dairy manufacturing hub which should alleviate current local market supply constraints; and (iii) potential margin reprieve from softening skim milk powder (SMP) and whey prices ' major input costs for condensed milk and evaporated milk. As it is, NZ wholesale milk prices recently slumped 35% to a 13-month low on increased global supply from northern hemisphere producers.
We expect a stronger 4QFY11F, spurred by the Hari Raya Aidilfitri celebration to meet our full-year forecast. For FY12F, our revised earnings model indicates a marginal earnings contraction (-14% year-on-year) due to the absence of contribution from its property arm and partial earnings vacuum from the loss of the Coca-Cola contract. However, we view this as more of a transitory period, rather than terminal. We continue to like the stock for its strong earnings profile, market share leadership positioning and strong brand equity strength. ' AmResearch, Sept 14
This article appeared in The Edge Financial Daily, September 15, 2011.
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