Maybank IB upgrades F&N to buy

Maybank IB upgrades F&N to buy

Tags: Brokers Call F&N Maybank IB

Written by Financial Daily
Monday, 10 August 2009 11:37

MAYBANK Investment Bank (Maybank IB) has upgraded FRASER & NEAVE HOLDINGS BHD [] (F&N) to a buy at RM9.80, from hold previously, with a higher target price of RM11.16 (from RM9.20).

The research house said margins at the company’s dairies division had expanded back to FY03-FY06 levels while F&N’s Thailand dairy assets were set to propel the division to become F&N’s largest based on operating profit, surpassing the soft drinks division.

“We are raising our earnings forecasts by 10%-25% as skimmed milk powder prices appear set to return to long-term equilibrium levels,” it said in a report last Friday.

The research house said F&N’s third-quarter (3QFY09) results were above expectations, and net profit soared 49% year-on-year (y-o-y) to RM59 million as the two largest divisions, soft drinks and dairies, both outperformed.

“Soft drink revenues rose 18% y-o-y in spite of the absence of major festivities during the quarter. This helped the operating profit margin expand by 1.2 percentage points y-o-y to 10.2%,” it said.

Maybank IB said skimmed milk powder costs fell 44% y-o-y and dairies division operating profit rose 35% y-o-y in spite of marginally lower revenues.

“This appears to be the historical equilibrium range at which F&N was able to record operating profit margins of about 7% in four of the five years before it acquired the Thailand assets,” it said.

The research house noted that the dairies division margins appeared sustainable, and looked ready to surpass the soft drinks division as F&N’s main operating profit contributor.

“We raise our FY09-11 forecasts for this division by 42%-63% on the expectation that operating margins can be sustained at a minimum of 7% (versus 4.5% in FY08),” it said.

Maybank IB said while it awaited clearer management guidance on developments at its two smaller divisions, it acknowledged the brighter prospects for the group’s two key divisions in the forecast period.

“F&N’s stronger earnings potential and stronger cash flow generation justify a raising of our target price-earnings ratio (PER) multiple to 17 times CY10 PER, (from 16 times PER) which is at the top end of historical valuations,” it said.

F&N notched up 10 sen to close at RM9.90 last Friday.


This article appeared in The Edge Financial Daily, August 10, 2009.