CIMB Research Sees Stronger Earnings Ahead For F&N

CIMB Research Sees Stronger Earnings Ahead For F&N - CIMB Equities Research expects Fraser & Neave Holdings to record a stronger second half for the current financial year ending Sept 30, 2018 on the back of softening commodity prices.

It said on Friday F&N has effectively hedged its raw material requirements, particularly for milk powder, up until September 2018F. 

The group hedges a significant amount of its forex on necessary raw material purchases and leaves only a small amount unhedged.

“Looking ahead, we think the group will only reap the benefits from lower sugar prices in 2H18F as it had locked in sugar prices at a high last year,” it said.       

CIMB Research said while it leaves its earnings forecast and Hold call unchanged for now, it raised the discounted cashflow based target price to RM36.20 as it lowered its beta assumption to align it to the latest five years historical figure. 

“While we think the group will continue to post healthy earnings growth on the back of lower input costs and resilient earnings profile, we think it is fairly valued for now. Estimated FY18-20F dividend yields of 2.3%-2.5% should support its share price,” it said.  

To recap, F&N’s 2QFY9/18 revenue in the period ended March 31, rose 2.2% year-on-year to RM1bil but core net profit fell 4% year-on-year to RM102.8mil. 

This brought 1H core net profit to RM211mil (after stripping out forex loss of RM11.6mil), which was in line with its and market expectations, making up 51% and 49% of the respective full-year forecasts. 

Operating profit decline was due to higher input costs. F&N’s 2QFY9/18 reported operating profit fell 15.6% year-on-year largely due to weaker performance from F&B Malaysia and F&B Thailand, which reported EBIT declines of 24.9% year-on-year and 4.1% year-on-year respectively. 

F&B Malaysia was hurt by higher input costs and A&P spend while F&B Thailand saw increased production costs, partly offset by lower A&P spend. 

Excluding provision for inventories damaged in a fire in Thailand and reversal of restructuring costs in Malaysia, 1H18 core EBIT fell 17.2% year-on-year to RM213.8mil.    

The group’s 2Q18 year-on-year sales growth was supported by better showing from its F&B Malaysia unit (+7% year-on-year) on the back of: i) stronger sales during the Chinese New Year celebrations; ii) a 2-week shift in sell-in window for CNY 2018 which fell in mid-Feb vs. end-Jan in 2017; and iii) double-digit growth in its export market.  

Meanwhile, F&B Thailand’s 2QFY18 revenue eased 3.6% year-on-year to RM432.5mil due to difficult domestic market conditions amidst a soft economy as well as the production loss of UHT milk, which was caused by product shortages. One of its co-manufacturers' plant was damaged by fire in November 2017.

This was all partly offset by the double-digit growth in exports to the Indochina region.