We attended Fraser & Neave Holdings Berhad (F&N)'s post-results briefing yesterday, with the following key takeaways:

i) Revenue Remains Stable in FY25

ii) Minimal Impact of Higher Sugar-Sweetened Beverage (SSB) Tax

iii) Delay in Dairy Farming Project We continue to favour F&N, supported by heightened demand in both Malaysia and Thailand, as well as the stable profitability.

We maintain our Buy recommendation on F&N, with a revised target price of RM34.44/share based on the DDM valuation approach.

Revenue Remains Stable in FY25

To recap, FY24 revenue rose by 4.9% YoY to RM5.2bn, driven by stronger contributions from both F&B Malaysia and Thailand. Looking ahead to FY25, we expect revenue growth to remain stable, supported by a recovery in tourist arrivals, which is expected to return to pre-pandemic levels, and an increase in the minimum wage, likely to boost consumption. In parallel, the group will continue to enhance operational efficiency through automation solutions and implement necessary cost management strategies. As a result, we forecast FY25 revenue to rise by 1.5% YoY to RM5.3bn. Meanwhile, EBIT margin is projected to improve by 0.9%-pts YoY to 14.4% in FY25, driven by effective cost management.

Minimal Impact of Higher SSB Tax

Currently, F&N offers a diverse product portfolio with over 30 brands across 14 categories, with beverages as the largest segment. According to management, F&N’s Ready-to-Drink (RTD) products that exceed the SSB tax threshold of 5 grams of sugar per 100ml contribute less than 1% of the group’s total revenue. Notably, products that fall under the tax threshold include RANGER Rimau (energy drink), F&N Teh Tarik, and Magnolia Sterilised Milk.

A 40.0sen increase in the SSB tax is expected to have only a marginal impact on the group, with F&N facing an additional RM1.2mn in tax expenses. Based on our estimates, this would increase the FY25 effective tax rate by approximately 0.2%- pts. Notably, more than 90% of the RTD beverages sold are healthier options with lower sugar content. As such, we expect F&N to continue emphasising the sugar content and nutritional value of its products. Overall, we believe F&N's product prices will remain unchanged following the SSB tax hike, as management is considering absorbing the increased tax burden.

Delay in Dairy Farming Project

We gathered that F&N’s first milk production will be delayed by an additional 6 to 12 months, pushing the timeline beyond the initially planned 1QCY25. This delay follows the Department of Veterinary Services (DVS) decision to revoke the import permit for dairy cows from the US due to concerns over the potential spread of Avian Flu, which could also affect the poultry industry. As a result, the 2,500 pregnant heifers originally intended for the Gemas farm will now be sold in the US domestic market. In response, F&N is in discussions with its vendors and regulators in Malaysia to explore alternative sourcing options. We believe the group will seek dairy cows with higher milk yields from regions or countries that are free from the Avian Influenza virus (H5N1). Overall, we expect F&N’s dairy farming venture to breakeven within 3 to 4 years.

Revised Earnings Lower

After incorporating the FY24 figures, we have revised our earnings projections for FY25 and FY26 downward by 11.7% and 7.3%, respectively. This adjustment is primarily due to the absence of Board of Investment (BOI) incentives for its operations in Thailand, which will result in higher tax expenses moving forward, as well as increased marketing expenses to drive topline growth. Additionally, we have introduced our FY27F core earnings forecast at RM654.4mn (+6.2% YoY).

Valuation

We have revised our target price to RM34.44/share (previously: RM34.76) based on the DDM valuation approach (k: 6.3%; g: 3.0%). Reiterate our Buy recommendation.

Source: TA Research - 7 Nov 2024