Fraser & Neave - Vinamilk to Power Earnings Growth
- Since Dec 2016, F&N has deployed a substantial part of its war chest to increase its stake in Vietnam Dairy Products JSC, also commonly known as Vinamilk (VNM NM, Not rated). F&N has spent ~SGD850m to raise its stake in the Vietnamese dairy company to 17.7% from 11%.
- Vinamilk is Vietnam's largest company by market capitalisation and is also largest dairy company in the country, with over 50% market share in various milk categories. The acquisition opportunity came about as a result of the Vietnamese Government's intention to reduce their stake in state-owned enterprises through a privatisation drive.
- Growth through acquisitions is in-line with F&N’s goals to rebuild itself into a regional food & beverage (F&B) power house, especially after it had sold its stake in Asia Pacific Breweries (2012) and Myanmar Brewery (2015) amidst the takeover of F&N by TCC/ Thai Beverage PCL (ThaiBev) (THBEV SP, Not rated).
- Left with a SGD1bn of war chest and ample debt capacity, Vinamilk is the first large F&B company that has been targeted by F&N. Management has highlighted that acquisitions outside of Thailand will be undertaken by F&N rather than by ThaiBev. As such, we expect F&N to remain on the lookout for additional acquisition opportunities in the region.
- In FY16, Vinamilk contributed SGD48m to F&N's bottom line via dividend income, accounting for 44% of the Group's net profit of SGD108m. With increased stake in Vinamilk, coupled with Vinamilk's strong organic growth, we believe dividend income from Vinamilk could double to SGD94m in FY17. This alone would boost F&N’s earnings by 40%, assuming profits at its diary/soft drink divisions remain unchanged.
- F&N is looking to further raise its stake in Vinamilk to at least 20% so that it can equity account for its share of profits from the later.
- While we do not have a formal rating or TP for F&N, our back-of-envelope SOP valuation suggest a fair value of SGD2.76 per share.
- Our SOP is based on F&N’s 56% stake in F&N Berhad, value from its publishing and printing business, value of its 18% stake in Vinamilk and its cash holdings.