F & N - DBS Research 2017-08-10: Lifted By Recognition Of Associate’s Contribution

F & N - DBS Vickers 2017-08-10: Lifted By Recognition Of Associate’s Contribution FRASER AND NEAVE, LIMITED F99.SI

F & N - Lifted By Recognition Of Associate’s Contribution

  • F&N's 3Q17 core profit largely in line; headline profit lifted by recognition of associate’s contribution, fair value gains.
  • Dairies’ performance mitigated weakness in beverages and printing and publishing.
  • Forecast adjusted to reflect dairies margins, lower MI and taxes.
  • Maintain HOLD, TP: S$2.57.



Maintain HOLD, raised forecast. 

  • We maintain our HOLD recommendation and TP of S$2.57 on FNN, but raised our forecasts by 18%/ 11%/ 11% for FY17F/18F/FY19F, as we align our dairy margins assumptions to reflect YTD trends, coupled with a lower effective tax and minority interests. 
  • While we project EPS growth, this is driven by increased stronger contribution from its associate, Vinamilk. 
  • Margins for its core operations could moderate going forward given higher input prices and thus believe the current share price already reflects its current growth profile.


WHAT’S NEW


Lifted by associates 3Q17 results largely in line, headline profit surged on exceptional gains. 

  • FNN’s headline net profit soared to S$1.26bn on the back of revenue of S$483m. The strong surge was due to an exceptional gain of S$1.195bn relating to the realisation of fair value in the investment in Vinamilk.
  • This arose from recognizing Vinamilk as an associate company for the group.

Excluding the above, net profit grew by 59.9% y-o-y to S$60.7m, largely due to recognition of Vinamilk’s share of profits as well as dividend income with a higher equity stake.

  • FNN has increased its stake in Vinamilk to 18.74% as of May 2017. Operating profit margin from dairies in Thailand was a positive surprise.
  • Revenue dipped by 8.6%. Group revenue dipped to S$483.1m (-8.6% y-o-y) arising from lower contribution from all its business segments.

Beverage remains weak. 

  • Despite Hari Raya occurring in June this year and within this reported quarter (as compared to last year), beverage revenue dropped by 17.1% y-o-y due to competitive pricing pressures in Singapore and weak consumer sentiment in Malaysia. 
  • Beverages EBIT was only S$2.1m, compared to S$9m in 3Q16, due to slower sales, higher input prices and competition in its home markets. EBIT was also impacted by promotional and sponsorship expenses to build its presence in new markets.

Dairies was the brighter spot. 

  • Despite weaker revenue (-3.3% y-o-y, to S$276.1m), we estimate that EBIT contribution from dairies (excluding Vietnam) stood at S$26m, a marked improvement from S$17.8m in the same period last year. This improvement came about from higher margins in Thailand, benefitting from favourable input and packaging costs.

Printing and publishing continued to languish. 

  • Revenue for the segment dipped by 9.2% y-o-y to S$65.5m, due to lower education publishing sales in the US. The segment recorded a EBIT loss of S$2.7m.


Valuation and forecasts 


Maintain HOLD, raised forecasts to reflect lower taxes and minority interests. 

  • We raised our forecasts by 18%/ 11%/ 11% for FY17F/ 18F/ 19F as we align our dairy margin assumptions to reflect YTD trends, coupled with a lower effective tax and minority interests. We maintain our sum-of-parts TP for FNN at S$2.57.
  • 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, 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.


Potential catalyst. 

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


Valuation

  • Our sum-of-parts target price remains at S$ 2.57, based on share prices from its two main entities – F&N Berhad and Vinamilk, offset by estimated net debt attributed to the group.
  • Our TP implies a PE of c.24.4x for FY18F.


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 | Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2017-08-10
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.570 Same 2.570



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