F & N - DBS Research 2016-08-05: Boosted by lower raw material costs

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FRASER AND NEAVE, LIMITED F99.SI

F & N - Boosted by lower raw material costs

• 3Q16 slightly ahead, driven by strong dairy margins, lower effective taxes.
• Beverage revenue down on sentiment, FX.
• Key catalyst is inorganic growth, deployment of cash.
• Revised forecasts by 4-5%, HOLD maintained.

Maintain HOLD, TP revised to S$2.30.

• We maintain our HOLD recommendation for FNN with a revised sum-of-parts based TP of S$2.30. 
• While valuations look stretched at over 30x FY16F PE, its ex-cash PE stands at c.22x. 

3Q16 slightly ahead on margins, taxes.

• FNN’s headline net profit dropped 20% y-o-y to S$38m, mainly due to the disposal of its 55% stake in Myanmar Brewery Limited. 
• Excluding that, net profit growth would have been 53%, on revenue of S$488.7m (-4% y-o-y). 
• As per previous quarters, this was due to the surge in Dairies PBIT margins (by 470bps) coupled with lower effective taxes. This was partially offset by weaker Beverages contribution which saw revenues dipping by 9% due to loss of RedBull’s contribution, softer sentiment, increased competition and brand investment despite the earlier Hari Raya season in 2016. 
• Continues to be on the lookout for acquisition.

Balance sheet looks strong with $700m cash available for acquisition.

• It had acquired Warburg Vending for S$29m. There have been announcements by management that it is keen to explore options and we believe it continues to be on the prowl for acquisitions, which could be relatively large following its unsuccessful bid for Grolsch & Peroni brands earlier this year. 
• 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. 

Valuation:

• Our sum-of-parts target price is revised to S$2.30, based on the market/estimated values of its listed entities, investments and net cash attributable to the Group. 

Key Risks to Our View: 

• 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 CFA DBS Vickers | http://www.dbsvickers.com/ 2016-08-05

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.300 Up 2.200