F & N - DBS Research 2017-06-29: Raising Forecasts To Factor In Associate Treatment For Vinamilk

F & N - DBS Vickers 2017-06-29: Raising Forecasts To Factor In Associate Treatment For Vinamilk FRASER AND NEAVE, LIMITED F99.SI

F & N - Raising Forecasts To Factor In Associate Treatment For Vinamilk

  • Revised forecasts to account for associate treatment of stake in Vinamilk.
  • Likely to be the vehicle of regional expansion for ThaiBev.
  • Continues to be on prowl for inorganic growth opportunities.
  • Maintain HOLD, sum-of-parts Target Price raised to S$2.57.



Maintain HOLD, raised forecasts. 

  • We maintain our HOLD recommendation on FNN, but raised our Target Price to S$2.57 and forecasts by 8%/31% for FY17F/18F, taking into account the treatment of its increased stake in Vinamilk as an associate, from an investment previously. 
  • Our higher TP reflects the higher stake and market value in Vinamilk, coupled with a higher market price for F&N Berhad, the group’s Malaysia-listed subsidiary.


Vietnam is now the key profit contributor 


Raising estimates to account for Vinamilk's contribution as associate. 

  • We raised our FY17F and FY18F forecasts by 9% and 32% respectively, taking into consideration the treatment of its increased stake in Vinamilk. 
  • As of May 2017, FNN had increased its stake in Vinamilk to 18.74%, and indicated that it has plans to further increase this. Along with its increase in equity stake, it now has two board seats which is deemed as having influence, and hence Vinamilk will be treated as an associate. 
  • Prior to this, FNN had only recognised its stake in Vinamilk as an investment, and booked dividends received as income.

Focus on inorganic pursuits, still looking to increase stake in Vinamilk. 

  • We continue to adopt the view that FNN will focus on inorganic growth opportunities to supplement growth. 
  • In an announcement to the Ho Chi Minh Stock Exchange, the group indicated its intention to further acquire up to an additional 14.51m shares, representing about 1% of Vinamilk's issued share capital.

Vietnam now the largest profit contributor to FNN. 

  • With the equity accounting treatment, we estimate that Vietnam now accounts for c.40% of the group’s PBIT, based on FY16 pro-forma figures. This is an increase from the previous 23% contribution.
  • We continue to believe FNN will be the vehicle for ThaiBev’s expansion outside of Thailand and for non-spirits businesses. 
  • In addition, contrary to market expectations, we do not think that there will be an outright share swap between ThaiBev and TCC Assets for FNN and FCL shares. Instead, we believe ThaiBev will only increase its stake in FNN when opportune, such as when FNN undertakes an equity fund-raising exercise, as and when it requires additional capital for expansion.
  • FNN has indicated that it would acquire more shares in Vinamilk if opportunities arise. This development is within our earlier expectations that the group would be looking for inorganic growth sources. Beyond that, we believe it would continue to be on the prowl for acquisitions. While its available cash has been largely depleted by its investment in Vinamilk, we believe it will leverage on its balance sheet for debt, and possibly equity fund raising.


Where we differ? 


Vehicle for expansion for ThaiBev. 

  • We continue to believe FNN will be the vehicle for ThaiBev’s expansion outside of Thailand and for non-spirits businesses. In addition, contrary to market expectations, we do not think that there will be an outright share swap between ThaiBev and TCC Assets for FNN shares. 
  • Instead, we believe ThaiBev will only increase its stake in FNN when opportune, such as when FNN undertakes an equity fund-raising exercise, as and when it requires additional capital for expansion.


Valuation & Forecasts 


Raised forecasts to factor in equity accounting treatment. 

  • We raised our forecasts by 8%/31% for FY17F/18F arising from the increased stake in Vinamilk, coupled with the equity accounting treatment. Previously, Vinamilk was treated as an investment with its dividends recognised as income by FNN.
  • Our Target Price for FNN is raised to S$2.57 as we factor in the higher market values for Vinamilk and F&N Berhad, offset by its attributed net debt position, from net cash prior to its stake increase in Vinamilk. Since December 2016, the group has been increasing its stake in Vinamilk, to 18.74% currently.
  • We maintain our HOLD recommendation.


Potential catalyst. 

  • Acquisitions, better-than-expected operational performance, particularly in new markets.


Key Risks to Our View

  • Our neutral view is premised on FNN's valuation vis-à-vis its current growth profile. 
  • Upside/downside risks could arise from acquisitions deemed accretive/dilutive to existing shareholders.




Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2017-06-29
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.57 Up 2.370



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