F & N : Downgrade to SELL at RM15.70 with TP of RM16

F&N contends with volatile commodity prices

Fraser & Neave Holdings Bhd
(Nov 10, RM15.60)

Downgrade to sell at RM15.70 with a target price of RM16: Fraser & Neave Holdings Bhd (F&N) held an analysts’ briefing on Tuesday, following the announcement of its results for FY10 ending December. Recall that F&N performed tremendously well with a core net profit of RM308 million, or 57% annual  growth.

F&N’s 4Q results were anchored by the Hari Raya Aidilfitri season which fuelled soft drink sales by 28% year-on-year (y-o-y). FY10 revenue  from soft drinks came to RM1.59 billion, or 44% of the group’s total revenue.

Earnings before interest and tax (Ebit) margin improved to 12.2% from 10.4% a year earlier. The results were partly due to  double-digit volume growth of 100 Plus and Seasons beverages. Hence, volume soared 20% to 62 million cases.

Red Bull showed its colour with a five-month contribution of 2% of total volume. According to management, the recently launched Seasons fruit teas and Fruit Tree juices are set to be the new growth drivers for its portfolio.

As expected, its dairy division delivered 4% growth in revenue to RM1.98 billion with Ebit margin improving one percentage point to 8.3%.

Note that the additional capacity will come in from the new Pulau Indah plant, which is expected to be completed in June next year.

The potential threat to F&N is the volatility in commodity prices. However, based on recent checks, the company has increased the selling prices of  its condensed milk by an average of 5% or 10 sen.
Thus, we do not expect a huge impact on sales volume following the price increase as most of its products are priced below RM5.

We maintain our RM16 target price for F&N shares based on a price-to-earnings ratio of 18 times FY11 earnings. However, given the price rally on Tuesday, we downgrade F&N to “sell”. —  TA Securities, Nov 10