F&N’s 1QFY24 results beat expectations thanks to a favourable product mix, lower input cost, and improved efficiency. Its outlook remains positive, underpinned by robust demand and its focus on the Halal food and dairy segments. We raise our FY24-25F net profit forecasts by 11% and 10%, respectively, lift our TP by 10% to RM33.80 (from RM30.70) and maintain our OUTPERFORM call.

F&N's 1QFY24 core net profit of RM166m (excluding RM4.4m loss arising from the non-operating items related to the previous flood incident) beat expectations, coming in at 34% and 32% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from a favourable product mix, lower input cost, and better operating efficiency. No dividend was declared during the quarter, as expected. For the full financial year, we expect the group to distribute a total dividend of 77.0 sen. This implied a dividend payout ratio of 51%, consistent with its historical trend, and translates to a dividend yield of 2.8%.

YoY, F&N's revenue grew by 9%, with Malaysia sales rising 7% and Thailand sales increasing 13%. This growth was driven by stronger market penetration in Malaysia's dairy and food segments, and a full quarter's contribution from Cocoaland. Its Thailand's performance benefited from increased domestic sales, stronger exports, and favourable currency exchange rates. Its EBIT grew by a stronger 57% thanks to a better product mix, lower input cost, and improved operational and supply chain efficiencies.

QoQ, its top line climbed by 7% primarily due to festive sales in Malaysia F&B segment and enhanced sales penetration in dairy and food products. Its EBIT surged by a steeper 25% due to lower commodity costs (except for sugar).

Outlook. F&N's earnings outlook appears promising, bolstered by the normalization of economic activities and consumer behaviour, along with the resurgence of international tourism in Malaysia and Thailand, which is expected to boost export sales. The company's ongoing initiatives to strengthen its Halal packaged food and dairy segments, as well as efforts to consolidate the manufacturing processes of its entire food business, are anticipated to enhance production capacity and streamline operations.

Forecasts. We raised our FY24F/FY25F net profit by 11% and 10%, respectively, after imputing higher turnover and raising our margins assumptions.

Valuations. Consequently, we also raise our TP to RM33.80 (from RM30.70 previously) based on unchanged FY25F targeted PER of 22x, 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) the robust demand recovery in beverages and ready-to-drink products post pandemic, (ii) strong export sales from competitive pricing, (iii) the steady demand for essential food items, and (iv) improved outlook in the Thailand market, driven by a revival in domestic consumption and tourism. Maintain OUTPERFORM.

Risks to our call include: (i) an uptick in food commodities prices, (ii) sustained high inflation eating into consumer spending power, and (iii) downtrading by consumers i.e. switching to cheaper alternatives.

Source: Kenanga Research - 2 Feb 2024