F & N - DBS Research 2016-11-09: Margins a challenge, but cashed up for acquisitions

F & N - DBS Vickers 2016-11-09: Margins a challenge, but cashed up for acquisitions FRASER AND NEAVE, LIMITED F99.SI

F & N - Margins a challenge, but cashed up for acquisitions

  • FY16 results above on higher margins and lower effective taxes; expect margins to moderate going forward.
  • Final DPS of 3 Scts; 60% payout ratio.
  • Deployment of cash for acquisitions is key catalyst.
  • Maintain HOLD; forecasts revised down by 4%.

Maintain HOLD, TP revised to S$2.36. 

  • We maintain our HOLD recommendation for FNN with a revised sum-of-parts-based TP of S$2.36. 
  • While valuations look stretched at over 33x FY17F PE, we estimate that its ex-cash PE stands at c.26x.

FY16 results above on higher margins, lower taxes, but to moderate going forward. 

  • Due to absence of one-off gains, FNN’s FY16 headline net profit slumped 83% y-o-y to S$108m.
  • However, core recurring profits grew strongly by 73%, excluding the contribution from discontinued operations (FY15).
  • The growth was driven mainly by margin expansion of its Dairies (+480bps) from last year due to effects of lower raw material input prices. We believe margins should have peaked; and, going into FY17F, we expect them to moderate as raw material prices have progressively crept up. We are projecting EBIT margins to soften to 5.4% in FY17F, from 6.5% in FY16. We trimmed our forecasts by 4%.

Key catalyst: leveraging on its balance sheet to deliver inorganic growth. 

  • Balance sheet remains strong with $700m cash available for acquisition. It had acquired Warburg Vending for S$29m. 
  • Management has announced that it is keen to explore options and we believe the company continues to be on the prowl for acquisitions, which could be relatively large. 
  • 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. In our view, that could provide a share price catalyst.


  • Our sum-of-parts target price is revised to S$2.36, 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/ 2016-11-09
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.36 Up 2.300