Fraser and Neave

Kim Eng on 10 Feb 2012

Falling behind consensus. Fraser and Neave (F&N) reported a 1QFY Sep12 revenue decline of 11% YoY to $1.4b due to lower revenues from soft drinks, dairies and property. Recurring net profit grew by just 2% YoY to $151m. Overall, the results were below expectations and we believe that the business headwinds may delay the potential corporate restructurings that would support a share price re-rating. We reduce our earnings estimates by 20-24% for FY Sep12F-13F and downgrade our recommendation to Hold with a lower target price of $7.05 (total return: 12%).


Troubles come in battalions. Subsidiary F&N Holdings Bhd’s (FNHB) 62% drop in earnings for 1QFY Sep12 affected the group’s net profit. The poor numbers reflected the impact of the massive floods in Thailand and the cessation of the Coca-Cola franchise from 1 October 2011. Its Thai dairy unit reported an operating loss of RM12m while soft drinks revenue dipped 22% YoY and 27% QoQ in the absence of the franchise. Meanwhile, the Malaysian dairy unit continued to be affected by the reduced sugar subsidies in Malaysia as revenues fell 12% and operating profit plunged 75%. Breweries were the only bright spot for F&N.


Property earnings to support. Property development revenue dipped by 34% YoY to $181m in 1QFY Sep12 due to the effects of completed projects in Singapore and lower sales from overseas development projects. However, we expect pre-sold development projects such as Punggol Watertown, Seastrand and Boathouse to underpin earnings in the next two years. The group continues to replenish its residential landbank. It had submitted the top bid of $345.9m (or $534 psf ppr) for the tender for a site in Bedok South Avenue 3, which closed yesterday. This was only 1% higher than the second-highest bidder. We estimate RNAV accretion of $0.02/share for this project.


Downgrade to Hold on valuations. We believe that the acquisition of FNHB, a potential re-rating catalyst, is now in limbo due to its current rich valuations of 26x FY Sep12F PER. Nevertheless, the ongoing expansion of the food & beverage business, divestment of non-core assets such as Changi City Point and dividend yield of 2.4% should lend support to the share price. Our earnings forecasts for FY Sep12F and FY Sep13F are cut by 24% and 20%, respectively, to reflect slower sales from development projects and lower dairies profits. Downgrade to Hold.