F & N - DBS Research 2016-02-04: Lion on the prowl

F&N FRASER AND NEAVE LIMITED F99.SI

F&N FRASER AND NEAVE LIMITED - Lion on the prowl

 1Q16 within expectations

 Strong Dairies PBIT offsets weaker soft drinks

 Beefs up balance sheet for acquisitions

 Maintain HOLD, TP: S$2.20

We maintain our HOLD recommendation for FNN with a sum-of-parts based TP of S$2.20.
While valuations look stretched at over 30x FY16F PE, its ex-cash PE stands at c.23x. 1Q16 within expectations.
FNN’s net profit dropped 29% y-o-y to S$25.5m, mainly due to the disposal of its 55% stake in Myanmar Brewery Limited.
Excluding the discontinued operations, net profit growth would have been 34%, even though revenue fell by 11% y-o-y to S$488.7m.
The stronger performance arose from a surge in Dairies PBIT margins (due to lower input costs and improved distribution) and a reversal in performance from Printing and Publishing division.
The strong performance was partially offset by weaker Beverages contribution, largely impacted by softer sentiment, increased competition and brand investment.

FNN is currently sitting on a net cash position, which we estimate will reach S$1bn by end FY16F. There have been announcements by management that it is keen to explore options; according to reports, the most recent was that it is in the final round of the auction for Grolsch & Peroni brands (currently owned by SAB).
Earlier, it was also reported that FNN is keen to increase its stake in Vinamilk.
Based on our initial estimates, FNN would be able to embark on these acquisitions, but funding would be via a mix of debt and equity, coupled with its current internal resources.

Our sum-of-parts target price of S$2.20 is derived from the market values of its listed entities, investments and estimated net cash.

Our neutral view is premised on FNN’s net cash position and ability to deploy this for accretive acquisitions and/or special dividends.
Upside/ downside risks could arise from acquisitions deemed accretive/ dilutive to existing shareholders.

Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2016-02-04

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.20 Down 2.26