Fraser and Neave - Phillip Securities 2016-08-22: Lacking the pop factor

Fraser and Neave - Phillip Securities 2016-08-22:  Lacking the pop factor FRASER AND NEAVE, LIMITED F99.SI

Fraser and Neave - Lacking the pop factor

  • In a phase to fill in the gap due to loss of sales from its Beer business and Red Bull.
  • Lack of near term catalyst: new markets are still in nascent stage and no concrete acquisition plan yet.
  • Actions taken to improve sales and margins, but will not return to FY2014-level. 

Persistent macro headwinds dampen ASEAN consumer sentiment. 

  • We expect cautious consumer spending in the region to continue weighing against topline, and growth should remain tepid following the divestment of MBL business. Meanwhile, Fraser and Neave, Limited (FNN) leverages on strategic partnerships to build presence in new markets.

Losing momentum after the sale of Myanmar Brewery Limited (MBL) 

  • To recap, its Beer segment accounts for c.38% of FNN’s FY2014 EBIT with c.33% EBIT margin.
    1. Dairies is the only bright spot now. Low commodity prices and favourable product mix buoyed margins. We expect Dairies’ high EBIT margin of 12% to sustain into FY17F. However, due to lack of new geographical markets, there is limited room for Dairies to grow its topline.
    2. Without a strong growth driver, the Group's focus is now on margin enhancement initiatives and strengthening of its distribution network. But overcapacity issues in soft drinks still lingers post Coca-Cola’s departure. On the other hand, with a low single-digit royalty fees, we do not think the cross-production distribution from its partnership with Thai Beverage Public Company Limited (ThaiBev) could contribute much to the bottom line during its brand building phase. On that note, we also think that higher marketing costs will erode their bottom line.

We do not expect growth and margins to return to FY2014 level. 

  • But, we noted potential re-rating catalyst, and the question remains as: When and How? 
  • Vietnam is on state divestment drive, with two deals on the street: Vinamilk and Saigon Alcohol Beer and Beverages Corporation (SABECO). However, the divestment process has been going very slowly. 
  • Vietnam government announced its intention in mid-2015 but has yet to detail plans for the divestment, stating that it will sell its stakes only when it has identified new investments that are more profitable. Market may be celebrating a little too early.

50% dividend payout policy attainable in FY16-17F. 

  • Proceeds from MBL-sale provides plenty of capital headroom for the Group to expand. While there is no concrete acquisition plan yet, we expect FNN’s net cash position to strengthen to S$1.05bn and S$1.11bn at end-FY16F and FY17F, respectively, from the current S$0.97bn (as at 30 June 2016).

Investment Risks 

  1. Adverse foreign exchange movement could erode margins at least 80% of the cost of raw materials are denominated in USD c.77% of sales are derived from outside out Singapore. 
  2. Turnaround in prolonged low raw material prices would compress margins. 

Investment Actions 

  • In view of macro headwinds and cautious consumer sentiment, and lack of significant growth catalyst, we reset the FY17F EV/EBITDA multiple to peer average‘s 10.0x (from 12.8x). 
  • With the change of analyst, we downgraded our TP to S$1.93 (from S$2.40) and maintain “Reduce” rating.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-08-22
Phillip Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 2.40 Down 1.93