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

 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. 

2Q16 results spring no major surprises. 

  • 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. 

Improvement in PBIT margins from lower material costs. 

  • 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. 

Beverages marginally higher. 

  • 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. 

Dairies supported profits on lower commodity prices. 

  • 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. 

Printing and Publishing remained weak. 

  • 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. 

Awaiting further developments on S$700m cash deployment. 

  • 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. 

Maintain HOLD, TP unchanged at S$2.20. 

  • 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
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.20 Same 2.20