F&N - DBS Research 2016-05-11: Awaiting deployment of cash

F&N FRASER AND NEAVE LIMITED F99.SI

F &N - Awaiting deployment of cash

2Q16 core net profits within expectations; Dairies shine with higher margins, benefitting from lower commodity prices.
Interim 1.5-Sct DPS declared.
Awaiting deployment of cash for acquisitions; maintain HOLD and S$2.20 TP.

FNN core net profit grew by 32% y-o-y to S$11.6m although revenue dipped 4.9% to S$474.3m. Its bottom line (excluding discontinued ops) grew despite a drop in top line, helped by stronger contributions from its Dairies operations, coupled with higher interest income.
Headline net profit slumped by 54% y-o-y, but this was due to the disposal of its 55% stake in Myanmar Brewery Limited last August.
An interim DPS of 1.5 Scts has been declared, down from 2 Scts in 1H15.

The Group’s PBIT margins improved to 5.8%, up from 5.0% in 2Q15. This was led largely by its Dairies segment which saw PBIT margins increasing to 10.8%, a large improvement from the 7.2% seen in the same period a year ago.

Its beverage segment registered a marginal growth in revenue and PBIT of 2.5% and 1.4% y-o-y to S$144.6m and S$9.1m respectively.
Revenue growth was largely driven by volume growth, which in turn was boosted by the introduction of new products (Oishi Green Tea, est Cola, Cocolife) and commencement of distribution of soft drinks and 100Plus in Indonesia.
The performance was, however, partially negated by the loss of Red Bull sales and a weaker Ringgit.
Excluding Red Bull sales, revenue would have increased 16% y-o-y.

While revenue for Dairies dipped by 5.4%, PBIT surged by 41.1% y-o-y to S$28.1m. This was attributed to lower commodity prices and efficiencies.
The lower revenue was a result of a weaker Ringgit, lower sales volume and intense competition in Malaysia.
Its Dairies revenue from Thailand was impacted by the loss of sales from Bear brand and Milo UHT, coupled with a weaker Baht. This was partially mitigated by higher volume growth given its increased distribution network.

Its Printing & Publishing (P&P) saw a revenue decline of 15.8% y-o-y. This segment was affected by weak print demand in China and a lower publishing revenue in Latin America and the US. As a result, the segment registered a wider PBIT loss of S$6.5m, up from S$4.7m, due to the lower sales, coupled with higher expenses from its digital business.

The Group’s earlier pursuit of SAB’s Grolsch and Peroni beer brands were unsuccessful. We believe management is still very keen to deploy its cash, currently standing at S$700m, to supplement its current business and claw back profits lost from the divestment of its stake in MBL.
In our view, acquisitions are likely to be substantial and the purchase consideration could range from S$1bn to S$2.5bn.

We maintain our HOLD recommendation for FNN with sum-of-parts based TP of S$2.20.
While valuations look stretched at over 30x FY16F PE, we estimate that its ex-cash PE stands at c.23x.
Catalysts could come from acquisitions and/or payment of special dividends.

Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2016-05-11

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