Fraser And Neave - Phillip Securities 2017-08-10: Maiden Profit From Vinamilk Boosts PATMI

Fraser And Neave - Phillip Securities 2017-08-10: Maiden Profit From Vinamilk Boosts PATMI FRASER AND NEAVE, LIMITED F99.SI

Fraser And Neave - Maiden Profit From Vinamilk Boosts PATMI

  • FNN's 3Q17 revenue was lower than expected on weak beverages sales despite festive season.
  • Adjusted PATMI was higher than expected due to Vinamilk’s higher dividend income and maiden profit contribution.
  • Potential second Vinamilk stake sale in Oct-17; Additional stake in Vinamilk would provide a long tail for future earnings.
  • Maintained “Neutral” with higher SOTP-derived TP of S$2.52 (previously S$2.31).

The positives 

+ Higher 9M17 Core PATMI despite lower revenue due to the reclassification of Vietnam Dairy Products Joint Stock Company (“Vinamilk”) as an associate company. 

  • The Group has increased both its stake in Vinamilk to 18.74% with representation of two directors on the Vinamilk Board. Vinamillk boosted profitability via
    1. higher contribution of dividend income, and
    2. recognition of Vinamilk profit as associated company. 
  • Vinamilk paid out over 80% of its earnings to its shareholders in FY16 and has a track record of increasing dividend payout ratio over the past years. We expect a higher dividend income from Vinamilk to boost Fraser and Neave’s (“FNN”) investment income this year as Vinamilk has posted 17% YoY growth in PAT to VND5.85tn for 1H17.

+ Additional revenue streams from expanded distribution network and product range partially cushioned the slowdown in Soft Drinks business. 

  • These include:
    1. the vending business (acquired in Jul-16),
    2. penetration into New Markets (namely Indonesia, Myanmar and Vietnam);
    3. distribution of new third party brands (Ribena and Magners); and
    4. Singapore beer business. 
  • Notably, 9M17 revenue for New Markets increased by 26% YoY and Beer’s doubled YoY.

The negatives 

- Challenging environment in the Beverages and Dairies businesses in Malaysia and Singapore. 

  • Persistently weak demand and competitive pricing amidst rising raw material eroded margins.

- Lower revenue from Publishing led to further PBIT losses in the Printing and Publishing business. 

  • Losses widened by 54.8% to S$2.7mn in 3Q17 despite being post-restructuring.


  • Outlook remains challenging against a backdrop of continuing cost and pricing pressure in Singapore and Malaysia. In particular, we maintained our view of subdued demand in Malaysia in FY17-18. 
  • The upcoming general election in Malaysia could dampen consumer sentiment and weigh against Ringgit’s strength. 
  • Possible implementation of a sugar “sin tax” in Malaysia is another risk to margins and sales volume.

Maintained “Neutral” rating with higher sum-of-parts derived TP of S$2.52 (previously S$2.31) on Vinamilk’s reclassification as associate 

  • We expect Dairies to continue to provide strong support to Group’s earnings. We are also optimistic that the New Markets, particularly Vietnam and Myanmar, would continue to gain traction and lift sales for both Beverages and Dairies businesses. 
  • Upside surprise could come from higher contributions from Beer and new vending business.

Potential re-rating catalysts would be acquisition of additional stakes in Vinamilk and Saigon Alcohol Beer and Beverages Corporation (SABECO) 

  • The State Capital Investment Company (SCIC) has recently announced its intention to further sell over 48mn (or equivalent to 3.33%) of Vinamilk shares in Oct-17. 
    • The 3.33% stake is part of the 3.6% unsold Vinamilk’s charter capital during the previous sale in end-2016. Recall that only 5.4% of Vinamilk’s charter capital was successfully sold (to FNN), instead of SCIC’s initially planned 9%, due to restrictive investment caps and unfavorable market conditions.
    • We expect a more competitive stake sale this time as SCIC plans to remove all restrictions placed previously and push for a more transparent sale. Detailed information related to the upcoming sale, such as initial price, trading mode and minimum volume, will be made public in Sep-17.
    • The 3.33% stake is estimated to worth about US$285.9mn to US$307.9mn.
    • We expect FNN to fund any acquisitions via borrowings and/or internally generated fund. Net gearing ratio is currently at 6.9%, i.e. over S$2,000mn further headroom before hitting its ceiling of 80%.
  • Vinamilk commands about half of Vietnam’s domestic market share for dairy goods and has a steady earnings growth track record.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2017-08-10
Phillip Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.52 Up 2.310