Fraser And Neave - Phillip Securities 2018-05-09: Stronger Performance; Benefitting From Vinamilk

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FRASER AND NEAVE, LIMITED SGX: F99

Fraser And Neave - Stronger Performance; Benefitting From Vinamilk

• Fraser And Neave (FNN)'s 1H18 Revenue/Core PATMI met 50%/27% of our full year estimates.
• Dairies remained the strongest performer; Vinamilk contributed c.S$33mn or 38% to 1H2018 Group EBIT.
• Higher input and packaging costs, and brand investment expenses weighed on profitability.
• Declared interim dividend of 1.5 cents per share, unchanged from last year.
• Upgraded to BUY but lowered Target Price to S$2.75 (previously S$2.83) as we trimmed our FY18e earnings by 29% on rising input costs.

The Positives

• Higher export volume and stronger Malaysia Ringgit and Thai Baht drove Dairies sales. Double-digit export sales growth for Malaysia (mitigated lower domestic demand) and Thailand (reflecting an effective distribution expansion).
• Profit contribution from Vinamilk supported 1H18 Group earnings. Vinamilk (Vietnam Dairy Products Joint Stock Company), the Group’s associated company since Apr-17, has contributed c.S$33mn or 38% to 1H2018 Group EBIT. Despite rising input costs, 1H18 Dairies EBIT +28.9% y-o-y and cushioned the weaker performing Beverages.
• Publishing & Printing continued to improve post-restructuring. 1H2018 losses narrowed from S$7.9m to S$6.7m on improved operational efficiencies and productivity.

The Negatives

• Operating environment remained challenging for Beverages. Lower soft drinks sales, higher input costs, stiff competition and brand investment expenses lowered 1H2018 Beverages EBIT by 77.8% y-o-y. 1H18 EBIT margin fell 1pp (percentage point) to 0.3%.
• Higher dairy-based commodity prices trimmed Dairies profitability. 1H18 Dairies Malaysia EBIT was down 38% y-o-y as higher input and packaging costs shaved its EBIT margin by 8pp to 12%. Higher input costs also cut Vinamilk’s operating margin by 3pps to 25.7%. Meanwhile, Dairies Thailand performance was generally unchanged.

Outlook

We are cautiously optimistic on the trading environment in its core markets, i.e. Malaysia, Singapore and Thailand.

• We expect strengthening Ringgit and cash-handouts from Malaysia’s generous 2018 budget to spur domestic spending post-election. Singapore and Thailand’s private consumptions are turning the corner on the back of economic upturn.
• Having said that, rising input costs and intensified competition, and the Group’s continuous brand building efforts in New Markets, namely Myanmar, Vietnam and Indonesia, will continue to compress margins.
• Upgraded to BUY on recent FNN share price retracement. However, we have lowered our sum-of- parts derived Target Price to S$2.75 from S$2.83, as we cut our FY18e earnings by 29% on lower Beverages and Dairies margins.
• We believe that FY18e earnings would be supported by
  1. higher profit share from Vinamilk with full 12 months contribution in FY18e, and
  2. benefits from restructuring initiatives to be realized.
• We expect Vinamilk to continue to drive over 40% of the Group’s EBIT moving forward. Vinamilk has achieved 25% of its targeted 2018 net profit of VND10.75trn (or US$477mn) in the 1Q18. The Group currently owns 20.00% Vinamilk shares, up from 19.96% as at end- Mar18.

Potential re-rating catalyst:

1. Stronger than expected performance from Vinamilk;
2. A strong earnings turnaround for Printing & Publishing segment.

Other Updates

Returning to Myanmar’s Beer Business via Joint Venture with Shwe Than Lwin

• Emerald Brewery Myanmar Ltd, a joint venture between F&N (owns 49%) and Myanmar’s Shwe Than Lwin, has received Myanmar Investment Commission’s approval on 20 Mar-18 to manufacture and distribute beer.
• Awaiting more details on the JV, as well as updates on any potential CapEx to build a brewery.
• FNN will then have to compete with Myanmar Brewery (divested by FNN in 2015 and currently dominates the domestic beer market with 80% share) as well as Heineken and Carlsberg.

Entering into China, Hong Kong and Macau via Tsit Wing

• Tsit Wing International Holdings Limited is a leading integrated B2B coffee and black tea solutions provider in the Hong Kong, Macau and the PRC (People’s Republic of China). Its multi-channel distribution network reached c.60% of the food outlets in Hong Kong in 2016. It has the largest market share of 24.5% in terms of B2B revenue, according to Frost & Sullivan report.
• FNN has entered into a cornerstone investment agreement with Tsit Wing and to subscribe for c.4.42% interest for HK$58.88mn (or an implied P/E of 17.4x).
• The Group has also entered into a non-binding memorandum of understanding with Tsit Wing to explore business and product development opportunities in Hong Kong, Macau, the PRC and/or the Southeast Asia.
• Some of the strategic alliance initiatives include:
  1. FNN as its exclusive supplier of evaporated and condensed milk products;
  2. Tsit Wing to distribute FNN’s alcoholic and non-alcoholic beverage products;
  3. FNN to distribute Tsit Wing’s coffee and tea products;
  4. co-branded promotion of both companies’ products in food outlets; and
  5. co-develop new Ready-To-Drink products and beverage solutions.

Soh Lin Sin Phillip Securities | https://www.stocksbnb.com/ 2018-05-09

SGX Stock Analyst Report BUY Maintain BUY 2.75 Down 2.830