KUALA LUMPUR: Thailand operations should continue to helm Fraser & Neave Holdings Bhd’s (F&N) profitability, backed by better demand and dairy commodity prices, Kenanga Research said.
The firm believes attention should still be given to F&B Thailand (Food and Beverages Thailand) which will still lead group profits in the medium-term, making up 66 per cent of year-to-date operating profits.
“Primarily involved in dairy products (i.e. condensed milk), the segment will be hinged against dairy commodity prices, which should continue to demonstrate expanded margins from better prices than the prior year,” Kenanga Research said in a note today.
According to Global Dairy Trade, anhydrous milk fat (AMF) prices had recorded a 25 per cent decline in December 2018 from December 2017.
F&N recently announced RM30 million in capital expenditure plans to expand production lines in anticipation of new product ahead, leaning towards healthier offerings.
Kenanga Research said this appeared to be in preparation of the coming sugar tax, which could result in a three to five per cent increment in selling prices of products, which fall above the classified threshold.
“While we do not believe the resulting tax will not be overly detrimental to demand, new product ranges could work favourably as a means to improve market share,” it said.
Meanwhile, Kenanga Research said F&N’s first quarter core net profit of RM124.5 million was in line with its estimate, due to a seasonally stronger first half 2019 that was driven by Chinese New Year festivities.
“Additionally, there could potentially be further forward-buying from distributors, pre-sugar tax implementation in April 2019. No dividend was declared, as expected,” it said.
Year-on-year, F&N’s three month 2019 sales of RM1.01 billion was flattish as slightly weaker F&B Malaysia segment, probably dented by lower export contribution, was mitigated by improvements in F&B Thailand’s revenue.
Kenanga Research maintained its “market perform” stance on F&N with a higher target price of RM33.85 from RM33.30.
“Our call is premised on the rich valuations ascribed to large-cap F&B stocks in lieu of their sustainable and less volatile operating environment as opposed to other industries.
“However, dividend could be less exciting with low anticipated yields of circa two per cent. Nonetheless, the group’s strong operating cash position could fund further operational enhancements if needed,” it said.