Fraser & Neave - Business recovery at Dairies Thailand following floods last year HOLD

- We re-affirm our HOLD recommendation on Fraser & Neave Holdings (FNH), with an unchanged fair value of RM19.18/share based on a sum-of-parts valuation.

- FNH’s 1QFY13 net profit came in at RM57mil. We view that the results to be in line with ours, and consensus’ estimates, constituting 26% and 21%, respectively.

- 1QFY13 net profit grew 18% QoQ and 37% YoY. The underlying strength is attributed to Dairies Thailand’s business recovery back to the pre-floods level (resume to full production in 3QFY12) coupled with higher volume in Indochina. More importantly, Diaries Thailand has successfully penetrated Myanmar and is expected to intensify its efforts within Indochina.

- Profitability for Diaries Malaysia increased due to higher exports and favourable raw material prices, despite a slight 3% decline QoQ in revenue – impacted by intense price competition. 

- For the soft drinks division, profitability was maintained. Growth would continue to be well driven by star performers 100 Plus and Seasons, as well as its enlarged portfolio of products, with MyCola and 100PLUS Edge recently launched in November 2012.

- Dairies Malaysia started operating at its new manufacturing facility, Pulau Indah in December 2012 (production  capacity increased by 20%). The packing of the remaining production equipment from the previous manufacturing facility is expected to be completed by 2QFY13F. The redevelopment of Seksyen 13 is envisaged to commence by the middle of FY13F. 

- Thai tycoon, Charoen, has won majority control of Fraser and Neave Singapore (FNN Sp Equity, Non-rated). He owns 74% through combined holdings via Thai Beverage PCL and TCC Assets Ltd. The takeover offer is now unconditional and the deadline for acceptance of the offer has been extended to 18 February. 

- Given the change in ownership structure, Kirin Holdings has decided to sell its 15% stake in FNN. Charoen intends to keep FNN listed. But should Charoen receive sufficient acceptance to shrink FNN’s public float below 10%, he may decide otherwise.

- We see a greater emphasis on FNH’s (56% owned by FNN) soft drinks division. This is underpinned by cross-selling of products moving downstream and both parties cementing a stronger position in Southeast Asia, leveraging on each other’s distribution channel. 

- The stock is trading at 30x PE FY13F, higher than its 5-year peak of 28x. Valuation is on par with Nestle Malaysia Bhd’s (Nesz Mk Equity, Non-rated) 28x.  

Source: AmeSecurities