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This article first appeared in The Edge Financial Daily on February 6, 2018

Fraser & Neave Holdings Bhd
(Feb 5, RM29.88)
Upgrade to buy with a higher target price (TP) of RM33.74:
Fraser & Neave Holdings Bhd’s (F&N) food and beverage (F&B) segment in Malaysia dominated F&B Thailand’s in terms of a financial year 2017 (FY17) revenue breakdown with a revenue mix of about 57% and 43% respectively. However, FY17 operating profit was dominated by F&B Thailand (65%) over F&B Malaysia (35%) and we attribute this to cost differential between the two units, which resulted in F&B Thailand having a superior operating profit margin (13% in FY17) to its sister company F&B Malaysia (5% in FY17).

The management of the Thai F&N indicated that the sugar processing cost in Thailand is half the cost in Malaysia, staff wage is 315 Thai baht (RM38.58) per day or approximately RM800 per month, which is lower than the minimum wage of RM1,000 per month in Malaysia, and that fresh milk is locally sourced (70,000 tonnes in FY17), hence import duty is not required to be paid on it. 

Looking forward, the F&N management has guided that F&B Malaysia is currently paying RM2,340 per tonne for refined sugar. This is a 22% decline since mid-2017 and is expected to impact F&N’s FY18 earnings positively. Furthermore, the skimmed-milk powder price continued its downtrend movement to US$1,818 (RM7,090) per tonne level as of January 2018 which is a 30% decline year-on-year (y-o-y). For FY18, we project the refined sugar to cost an average of RM2,600 per tonne (-13.3% y-o-y) in Malaysia and RM1,400 per tonne (-9.6% y-o-y) in Thailand. Meanwhile, we expect the skimmed-milk powder to trade at an average of USS2,000 per tonne (- 4.8% y-o-y) in 2018. 

On the currency fronts, both the Thai baht and Malaysian ringgit are strengthening against the US dollar lately and this would benefit the group as a net importer. Note that approximately 60% of F&N’s raw materials are imported (skimmed-milk powder, whey and tin plates for packaging), which suggests that the FY18 production cost would be lower underpinned by both decline in commodity price and appreciation in the baht and the ringgit against the US dollar. Note that the current Malaysian ringgit (RM3.89/US dollar) and Thai baht (THB31.35/US dollar) has strengthened by 12.1% y-o-y and 10.6% y-o-y respectively against the US dollar. 

We upgrade our call to “buy” on F&N as the company is a beneficiary of the current downtrend in soft commodity prices and strengthening of the Malaysian ringgit and Thai baht against the US dollar. — TA Securities Research, Feb 5
 

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