F & N - DBS Research 2017-02-09: Softer margins as expected

F & N - DBS Vickers 2017-02-09: Softer margins as expected FRASER AND NEAVE, LIMITED F99.SI

F & N - Softer margins as expected

  • 1Q17 results within expectations; net profit down 12% y-o-y.
  • Beverages saw dip in PBIT due to margin compression, while Dairies maintained its contribution.
  • Increased stake in Vinamilk to 17.5%.
  • Raised forecasts to factor in higher investment income.

Maintain HOLD, TP revised to S$2.37. 

  • We maintain our HOLD recommendation for FNN with a sum-of-parts-based TP of S$2.37. 
  • We have raised our forecasts to take into account higher investment (dividend) income from its higher stake in Vinamilk. While its share price is at a relatively rich valuation of c.30x, we believe management is on the prowl for acquisitions to leverage on its balance sheet.

1Q17 results within expectations. 

  • FNN’s 1Q17 net profit dipped by 12% while revenue was relatively flat at S$495m (+0.2% yo-y).
  • This set of results and margins does not come as a surprise to us. While Beverages registered a growth of 5.2% y-o-y, PBIT fell by 19.7% to S$8.7m. Dairies revenue eked out marginal top-line growth of 2.4% y-o-y to S$278.6m, but PBIT margins remained resilient at 14.2%, up marginally from 1Q16’s 13.8%.
  • This was attributed to favourable milk-based commodity prices and timing of advertising spend. That said, we still remain cognisant that margins are likely to moderate going forward, in view of recent raw commodity price movements.

Increased stake in Vinamilk, more acquisitions to come? 

  • FNN has increased its stake by 5.4% to 16.35% in December 2016, and a further 1.1% to 17.5%. FNN has indicated that it would acquire more shares in Vinamilk if opportunities arise. This development is within our earlier expectations that the group would be looking for inorganic growth sources. Beyond that, we believe it would continue to be on the prowl for acquisitions. 
  • While its available cash has been largely depleted by its investment in Vinamilk, we believe it will leverage on its balance sheet for debt, and possibly equity fund raising.


  • Our sum-of-parts target price is revised to S$2.37, 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 valuation vis-à-vis its current growth profile. 
  • Upside/downside risks could arise from acquisitions deemed accretive/dilutive to existing shareholders.

Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2017-02-09
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.37 Up 2.360