Fraser & Neave - RHB Invest 2019-05-23: Buy Milk, Get Free Soft Drinks


Fraser & Neave - Buy Milk, Get Free Soft Drinks

  • FRASER AND NEAVE, LIMITED (F&N, SGX:F99) is a long-established beverage and dairy player, listed in Singapore and backed by Thai tycoon Charoen Sirivadhanabhakdi. It also engages in the printing & publishing business.
  • F&N’s profit is largely helmed by its dairy business, as well as a 20% stake in Vinamilk (VNM VN, NR). While the operating environment is tough for both beverage products and the print business, we think there is value in the stock, given that F&N Share Price is trading 13% below its SGD1.96 NAV/share.

Buy some milk and get soft drinks and books for free!

  • F&N owns 20% of Vinamilk and 55% of F&N Holdings (FNH MK) – this is in addition to its printing & publishing business. The value of F&N’s stake in Vinamilk works out to SGD1.87/share based on its current share price. This has already exceeded F&N's Share Price.
  • Meanwhile, its 55% stake in FNH is worth SGD1.54/share. Additionally, the printing & publishing division, though loss-making, still has a book value of c.SGD0.12/share. The SOP amounts to SGD3.53, which is double F&N's Share Price (See Figure1 in attached PDF report for value in F&N's subsidiaries & associates).

Earnings driver.

  • YTD, F&N’s dairy business and contributions from Vinamilk continue to drive earnings growth. It also offsets losses from the printing & publishing segment, as well as pre-operating costs incurred for a Myanmar greenfield brewery under the beverage division.
  • Keen competition from other beverage products and the introduction of an excise duty on sugary drinks in Malaysia effective 1 Jul are likely to weigh down on F&N’s Malaysia sales under the beverage segment. However, we note that the latter nation only contributes c.19% to group PATMI. We think this impact could potentially be offset by stronger growth in Thailand.
  • F&N is also looking to increase its stake in Vinamilk, which should also help support bottomline.

Potential acquisitions.

  • F&N is 59.3%-majority owned by TCC Assets and 28.5%-held by Thai Beverage (SGX:Y92). Both are backed by Charoen Sirivadhanabhakdi. (see also SGX Market Update - Highlights of Foreign Family Empires Listed on SGX)
  • Given Thai Beverage’s high net gearing, we believe F&N will be used as the Thai tycoon’s main investment vehicle for any strategic food & beverage acquisitions in the future.
  • F&N has a net gearing ratio of 0.1x as at 2QFY19 (Sep) and management is comfortable with a net gearing ratio below 0.8x. Consequently, there is ample room to take up more borrowings for future M&A. In addition, F&N may also use equity financing for such M&A, given its decent P/E valuation and securely-controlled majority shareholder. This could help improve the stock’s liquidity abd catalyse F&N's share price movements.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-23
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000