Fraser and Neave

DBS Group Research on 27 Aug 2012

FRASER and Neave's (FNN) board announced that it intends to distribute about S$4 billion of the cash proceeds to shareholders if and after the proposed sale of its effective stake in APB is approved and completed.

This equates to about 84 per cent of the disposal gain of S$4.8 billion (net of transaction costs) and about 72 per cent of the aggregate sale proceeds of S$5.59 billion.

The remaining amount of about S$1.6 billion will be used to repay existing debt.

The distribution will take place via a capital reduction exercise where one in three shares will be cancelled, and shareholders will receive S$8.50 a share for every share cancelled.

After the sale of its stake in Asia Pacific Breweries (APB) and the capital reduction, FNN's NAV per share and EPS (proforma as of June 12) will increase by 68.2 per cent and 9.8 per cent, respectively.

We believe this move will be beneficial to shareholders, providing commitment and certainty on the use of funds in relation to the sale proceeds from the proposed sale of APB.

The proposal could also signal management's confidence in the cashflow generating ability of the group, ex-brewery.

Pro forma gearing after the transaction and capital reduction would be 0.12x, down from 0.3x, as of 9M FY2012; and this will allow the group to gear up for expansion should any opportunities arise.

A maximum debt-equity ratio of about 0.8x provides an additional debt headroom of up to about S$5 billion.

We retain our "hold" recommendation given limited upside to our TP of S$8.99 (based on 15 per cent discount to our RNAV).

HOLD