CIMB Securities 2015-08-09: Fraser and Neave Limited F&N - 3Q15 Results. Unattractive without its best bits. Maintain REDUCE.


Unattractive without its best bits 

  • F&N’s 3QFY9/15 core net profit (S$40.5m) was above our but in line with the street’s FY15 estimates. 
  • 9M15 made up 81% of our full-year estimate, 74% of consensus. 
  • For 3Q, Soft drinks Malaysia and Dairies Thailand were the stars, while Myanmar beer growth slowed, further blunted by currency effects. 
  • This is an unusual quarter as beer would traditionally be the star. 
  • Our grouse with the stock is that with its acceptance to sell MBL, F&N’s best part will be gone, leaving behind slower-growth consumer businesses and a stock trading at steep ex-MBL valuations. 
  • We maintain our Reduce rating
  • Our sum-of-parts target price is cut to S$1.85, on the defined MBL value. 
  • Downside catalysts include the realisation of the earnings hole once MBL is wrestled away. 

Soft drinks did well, beer limped in 3Q 

  • F&N’s 3QFY9/15 revenue rose 4% yoy, driven by soft drinks and dairies. 
  • After a previous weak 2Q for soft drinks (Malaysia floods, pre-GST effects), the segment bounced back (revenue +13% yoy, EBIT +8% yoy) in Malaysia on Hari Raya promotions, distributors restocking and a re-packaging exercise for 100Plus. 
  • In contrast, beer did not do as well this quarter. Beer revenue was +5% yoy, blunted by a weakening kyat that detracted from a still-solid volume growth (14% yoy) and price hikes. 
  • A weaker kyat saw 3Q beer EBIT fall 5% yoy. 

Dairies Thailand 

  • Other than Soft drinks Malaysia, the growth thrust was from Dairies Thailand. The latter increased promotional, trade management activities, increased outlet penetration and Diaries Thailand had sales/PBIT grow 14%/77% yoy. 
  • Thai’s performance was blunted by slower growth in Dairies Singapore and Malaysia. 

But the crown jewel is soon to be let go 

  • Despite the good performance by Dairies Thailand, it is difficult to ignore that the biggest driver of F&N’s value remains its 55%-stake in Myanmar Brewery. 
  • We estimate that beer accounted for half of 9MFY9/15’s EBIT, so there will be an earnings hole next year. 
  • With a US$560m price for MBL marked out and F&N having agreed to let go of this crown jewel at the price, our sum-of-parts target price gets chopped down on a lowered valuation for MBL. 
  • Management has guided that it intends to use the proceeds for further investment in its core markets and new markets in ASEAN, putting paid to expectations of a special dividend as an unexpected positive catalyst for the share price.

Kenneth NG CFA | Jonathan SEOW | http://research.itradecimb.com/ CIMB Securities 2015-08-09
REDUCE Maintain REDUCE 1.85 Down 2.58