F & N - Earnings supported by disposal gains

• FY15 headline earnings held up by disposal gains

• Dairies was in line, but soft drinks fizzled out on brand investment in new markets and competition

• Sitting on net cash of S$865m; focus is on re-investment

Maintain HOLD, TP revised down to S$2.26

FY15 boosted by disposal gains; continuing operations below expectations on higher costs
FNN’s FY15 attributable profit surged manifold y-o-y to S$633m, but this was due to disposal gains of S$542m from the sale of its 55% stake in Myanmar Brewery Limited (MBL). Excluding this, net profit would have been S$68.7m, a drop from FY14’s core profit of S$85.7m. Total revenue achieved was S$2.1bn, similar to FY14. The group’s PBIT declined 11% to S$132m from S$148m (excluding S$21m revaluation gains) in FY14, due to higher expenditure on brand investment, lower soft drinks sales and higher distribution costs. Final DPS of 3 Scts was proposed, and coupled with 2 Scts interim dividend paid, DPS for FY15 was 5 Scts, similar to FY14.

Dairies improved while soft drinks lost its fizz
Revenue and contribution from Dairies improved from higher canned milk volumes and better PBIT margins of 6.1%, from 5.2% a year earlier. Soft drinks, however, faced challenges with PBIT dropping by 43% y-o-y to S$38m, due to a surge in brand investment costs (S$13m) in new markets, and weaker contribution from Malaysia and Singapore due to competition, unfavourable sales mix and higher costs.

Flushed with cash; re-investment is key to make up for MBL void 
The group ended the year with net cash of S$865m, largely from its disposal of MBL. We believe it is on the prowl for acquisitions to make up for void left by the higher margin beer business represented by its stake in MBL.

Technical Analysis
Daily Chart
Trimmed FY16/17F earnings by 6%/5%; maintain HOLD, TP adjusted to S$2.26
We revised our FY16F/17F forecasts down by 6%/5% to account for higher brand investment costs into new markets. Our sum-of-parts TP is revised down to S$2.26, taking into account lower net cash from MBL’s disposal, net of costs and taxes. (Read Report)

Source : DBS Group Research

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