F & N - DBS Research 2017-05-09: Increases Stake in Vinamilk to 18.74%

F & N - DBS Vickers 2017-05-09: Increases Stake in Vinamilk to 18.74% FRASER AND NEAVE, LIMITED F99.SI

F & N - Increases Stake in Vinamilk to 18.74%

  • 2Q17 results weak but within expectations; interim DPS of 1.5Scts declared, similar to last year.
  • Lacklustre Beverage performance mitigated partially by Dairies.
  • Stake in Vinamilk increased to 18.74%; equity accounted as associate going forward.
  • Maintain HOLD.

What’s New 

2Q17 results within expectations. 

  • F&N (FNN)’s 2Q17 net profit ended the quarter at S$8.5m, down by 29% y-o-y on the back of 5.8% y-o-y drop in revenue. 
  • Despite the drastic drop in net profit, with 1H17 accounting for 30% of our full year forecast, this is largely within our expectations as 1H17 net profit accounts for 30% of our full year forecasts which is similar to 1H16; and, we expect stronger profit contribution in 2H17, on the back of accounting for its increased equity stake in Vinamilk. 
  • 1H17 accounted for 62% of our FY17 operating profit, similar to 1H16 at 63%.

Beverages was lackluster. 

  • Beverage revenue dropped 21.5% y-o-y in 2Q17 to S$113.6m due to lower sales in Singapore and Malaysia, mitigated partially by vending business (acquired in July 2016), commencement of third party brands, and distribution network expansion in Myanmar.
  • The business segment posted a pretax loss of S$5.2m due to weak performances from Malaysia and Singapore, arising from weaker volumes, higher raw material prices and weaker Malaysian Ringgit. Investments on marketing and brand in Thailand also impacted PBIT (profit before interest and tax) contribution.

Dairies continues to shine, benefitting from lower input costs. 

  • Countering the weak Beverage performance, Dairies posted a strong performance with PBIT surging by 41.7% yo-y to S$39.8m due to lower commodity costs. 
  • Dairies’ revenue increased by 2.4% to S$271.6m, aided by domestic sales in Singapore (chilled products, yoghurt), Myanmar (Teapot brand), and Thailand (Teapot, Carnation brands). This was offset partially by 11.9% drop in revenue in Malaysia due to weaker consumer sentiment and competition.

Printing & Publishing continues to record losses, albeit smaller. 

  • The Printing & Publishing business remained weak and recorded a 4.5% y-o-y decline in revenue to S$66m, due to lower retail orders in Book and Magazine distribution, coupled with higher market returns. 
  • PBIT for the segment posted a lower losses of S$5.6m, vis-à-vis loss of S$6.5m last year due to improved efficiencies and cost control.

Interim DPS of 1.5 Scts declared. 

  • An interim dividend per share of 1.5 Scts was declared, similar to 1H16.

Stake in Vinamilk increased to 18.74%, to equity account as an associate. 

  • Since increasing its stake in Vinamilk to 17.5% around Feb, the group has further upped its shareholding to 18.74%. 
  • With another nominee representing FNN at the Board of Directors of Vinamilk, the Group now has two directors. 
  • According to the Singapore Financial Standards 28, the Group is deemed to have significant influence through this representation and will hence account for its investment in Vinamilk as an associate company.

Maintain HOLD, TP: S$2.37. 

  • We maintain our HOLD recommendation and sum-of-parts based TP of S$2.37 for now. 
  • While the Group has slipped into a marginal net debt position of S$97m, from a net cash position of S$908m as at end-Sep 2016, we believe it could continue to be on the prowl for inorganic growth opportunities. 
  • We do not rule out equity fund raising should it embark on large acquisitions, which should also aid in ThaiBev consolidating its stake in FNN.

Andy Sim CFA DBS Vickers | Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2017-05-09
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.370 Same 2.370