Fraser & Neave - Unattractive without its best bits

F&N’s 3QFY9/15 core net profit (S$40.5m) was above our but in line with the street’s FY15 estimates. 9M15 made up 81% of our full-year estimate, 74% of consensus. For 3Q, Soft drinks Malaysia and Dairies Thailand were the stars, while Myanmar beer growth slowed, further blunted by currency effects. This is an unusual quarter as beer would traditionally be the star. Our grouse with the stock is that with its acceptance to sell MBL, F&N’s best part will be gone, leaving behind slower-growth consumer businesses and a stock trading at steep ex-MBL valuations. We maintain our Reduce rating. Our sum-of-parts target price is cut to S$1.85, on the defined MBL value. Downside catalysts include the realisation of the earnings hole once MBL is wrestled away.

Soft drinks did well, beer limped in 3Q
F&N’s 3QFY9/15 revenue rose 4% yoy, driven by soft drinks and dairies. After a previous weak 2Q for soft drinks (Malaysia floods, pre-GST effects), the segment bounced back (revenue +13% yoy, EBIT +8% yoy) in Malaysia on Hari Raya promotions, distributors restocking and a re-packaging exercise for 100Plus. In contrast, beer did not do as well this quarter. Beer revenue was +5% yoy, blunted by a weakening kyat that detracted from a still-solid volume growth (14% yoy) and price hikes. A weaker kyat saw 3Q beer EBIT fall 5% yoy.

Dairies Thailand Other than Soft drinks Malaysia, the growth thrust was from Dairies Thailand. The latter increased promotional, trade management activities, increased outlet penetration and Diaries Thailand had sales/PBIT grow 14%/77% yoy. Thai’s performance was blunted by slower growth in Dairies Singapore and Malaysia.


Technical Analysis
Daily Chart
But the crown jewel is soon to be let go
Despite the good performance by Dairies Thailand, it is difficult to ignore that the biggest driver of F&N’s value remains its 55%-stake in Myanmar Brewery. We estimate that beer accounted for half of 9MFY9/15’s EBIT, so there will be an earnings hole next year. With a US$560m price for MBL marked out and F&N having agreed to let go of this crown jewel at the price, our sum-of-parts target price gets chopped down on a lowered valuation for MBL. Management has guided that it intends to use the proceeds for further investment in its core markets and new markets in ASEAN, putting paid to expectations of a special dividend as an unexpected positive catalyst for the share price. (Read Report)

Source : CIMB Research

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