Fraser & Neave - Weak 3Q, but seasonally stronger 4Q still holds HOLD

- We maintain our HOLD recommendation on Fraser & Neave (F&N), with an unchanged DCF-based fair value of RM18.10/share. 

- F&N’s 9MFY12 net profit of RM200mil outperformed full- year consensus estimate of RM194mil, but accounted for only 68% of our FY12F forecast. 

- Despite this, we maintain our FY12F-FY14F earnings forecasts, given a seasonally stronger 4Q. Earnings have historically been strongest at the beginning and end of its financial year due to festivities such as the Chinese New Year and Hari Raya Puasa.  

- F&N posted sequentially higher earnings which inched up 2% on the back of a 23% rise in revenue. However, normalised net profit for 3Q would have been higher excluding one-off charges totalling RM17.7mil comprising an RM8.5mil charge in relation to soft drinks rationalisation exercises, as well as accelerated depreciation charges and expenses in relation to its relocation to Pulau Indah totalling RM9.2mil. 

- On a YoY basis, 9MFY12 earnings were down 37% mainly due to a 19% decline turnover and lower EBITDA margin of 10% (YoY: -5.2ppts). On a normalised basis, F&N’s performance YTD was within expectations. 

- Stripping out the Coca-Cola business, the group’s revenue was down 7% YoY. This was mainly attributable to strong double-digit sales volume growth of non Coca-Cola soft drinks which was offset by:- 1) Losses in relation to Thai flooding at its dairy plant; 2) Lower dairy sales in Malaysia and; 3) Absence of property sales.     

- Moving forward, we expect 4QFY12 core earnings to be predominantly driven by the Hari Raya festive season and rising utilisation rates at its Thai diary plant. The group is also expected to recognise a deferred tax asset of RM21mil (in relation to the halal tax incentive granted to  Pulau Indah) upon commencement of operations of the remaining production lines. 

- F&N’s long-term earnings growth remains intact, well underpinned by higher demand for core soft drinks and dairies divisions, while contribution from its PJ mixed property development project with a GDV of RM1.3bil is expected to kick-in over the next few years. Newsflow on a potential acquisition by interested parties is expected to provide support to share price in the meantime.

Source: AmeSecurities