MIDF Research has maintained its neutral call on Fraser & Neave Holdings Bhd (F&N) with an unchanged target price of RM31.59 as it remains cautious of the impact Covid-19 will have on the company in the coming quarters due to changes in consumer behaviour and production disruptions with a smaller workforce and more stringent measures.
However, it believed that all these may normalise once people adapt to the new norm. “Other challenges include rising raw material costs and a stronger US dollar. On the brighter side, we believe that F&N will withstand these challenges due to its strong branding, agility in addressing new market norms, cost management and a strong balance sheet. As such, we maintain our neutral recommendation on the stock,” said its analyst Ng Bei Shan.
However, TA Securities has maintained its buy recommendation on the region’s food and beverage giant with an unchanged target price of RM42 per share. As a consumer staples incumbent with strong brand equity, it is confident that F&N would weather the near-term Covid-19 headwinds.
Amid these, demand for beverage products, particularly sports drinks and soft drinks, are likely to be weak due to the movement control order (MCO). That said, F&N’s robust balance sheet and strong brand equity are expected to help the group pull through.
“The group is expected to prioritise its commercial execution, accelerate product innovations, and enhance operational efficiencies alongside expanding its global reach through new market expansion and ecommerce penetration,” said TA analyst Jeff Lye.
F&N began operating its plant with reduced production hours and smaller workforce since the commencement of MCO. Given that the MCO has now been partially relaxed, it can be anticipated that F&N will gradually ramp up its production while safeguarding the wellbeing of its employees.
According to TA, F&N maintained its 2QFY20 operating profit at RM130.4 mil despite a 1.9% yoy decline in revenue. The steady performance was backed by F&B Thailand, which edged out higher revenue (4.3% yoy) and operating profit (2.5% yoy), offsetting the drag from F&B Malaysia where revenue and operating profit dropped 7.8% yoy and 13.7% yoy respectively due to adverse impact from Covid-19 outbreak and implementation of containment measures.
The outbreak has led to the postponement of orders due to disrupted shipping vessel arrangements in certain countries and dampened economic activities.
Cumulatively, 1HFY20 revenue and operating profit recorded 4.0% yoy and 2.2% yoy growth respectively, thanks to a strong 1QFY20 performance underpinned by strong brand loyalty resulting from effective commercial execution, enhanced distribution channel with wider coverage and new product variants.
The negative impact of the pandemic and MCO should see consumer demand softening but these could be mitigated by F&N’s proactive measures to adjust its route-to-market and channel strategies.
The change in strategy will also help F&N to be ready for the Raya festive season. It has hedged a portion of its raw materials to mitigate the impact of higher dairies input cost alongside other cost optimisation plans as part of its cost management.
However, MIDF remains cautious of the extent of the adverse impact considering the festive celebration may not be to the same extent as before. That said, a sooner-than-expected recovery of the situation may lead to stronger demand for beverages and creamer products.
The company has also announced that it has recovered the deposit for the Chuping land in Perlis to develop an integrated dairy farm as the sales and purchase agreement had lapsed.
While this is a long-term plan that may enhance its future operations and potential, the resources previously allocated for this development can be deployed for other opportunities that may fit the company. MIDF has not imputed any impact from the dairy farm project to its forecast.
Despite the cancellation of the land deal, TA still expects the group to pursue its medium-term plan of venturing into dairy farming when the opportunity arises, possibly in another location. – May 5, 2020
