By Chee Jo-Ey
Fraser & Neave Holdings Bhd (F&N) will likely be boosted by its move to go upstream but there are concerns that the rising competition as well as higher input cost will continue to dampen the company.
Based on a Bloomberg poll, there are two Holds, one Buy and one Sell recommendations. The average target price for the last 12 months is RM34.55.
MIDF Research analyst Nabil Fikri Zainoodin, who gave a Neutral rating, notes that intensifying competition and competitive price pressures especially in the canned milk and ready-to-drink segment in Malaysia could be a factor for not turning bullish on the counter.
He tells FocusM that the group’s earnings will continue to grow, driven by the better prospect for its Thai operations, but concerns on its near-term outlook for the domestic operations still remain.
The beverage segment in Malaysia has been plagued by rising competition and price pressures since the implementation of the sugar tax from July 1 this year.
However, TA Securities Holdings Bhd analyst Jeff Lye Zhen Xiong is positive on the stock with a Buy recommendation on F&N. “I’m looking forward to the company’s shift of focus on upstream production. The project is still at its early stages. The company has proposed to buy the land and the deal has not gotten through yet but the direction they are headed to is right,” he explains.
The research house maintains Buy on F&N with an unchanged target price of RM42 per share.
Fruitful Thai operations
Lye’s optimism is also attributed to the growing strength of the Thai baht and F&N’s operations in Thailand have been fruitful. He points out that the October-December quarter also tends to be the company’s strongest, thanks to recovery in sales and preparation for the Chinese New Year.
He forecasts that the group will prioritise its commercial execution in preparation for an early 2020 Chinese New Year festive sale, accelerate product innovations, and enhance operational efficiencies alongside expanding its global reach through new market expansion and e-commerce penetration.
With regard to the volatile input cost, Lye is hopeful that the group’s proactive management of its procurement and optimal pricing could mitigate any sharp and unfavourable movements in raw material prices.
F&N recently announced plans to widen its equity in the liquid milk business by venturing into integrated dairy farming and milk production with the purchase of 4,454ha of land in Chuping, Perlis.
The company is still waiting for approval from the relevant authorities but does not foresee any major delays to the conclusion of the sale and purchase agreement, which is expected to be completed in the second quarter of 2020. The land transaction is subject to approvals from the relevant federal and state authorities.
The proposed project will reduce the company’s exposure to foreign exchange fluctuations, currency outflow from the country and uncertainties in importing fresh milk and feed, while achieving control over the quality of milk from “grass to glass”.
F&N CEO Lim Yew Hoe says the company aims to be a major player in the health and wellness segment, with fresh milk as its new pillar of growth.
“While the project is seen as more of an upstream insourcing exercise, it will also allow the company to deepen and widen its equity in the liquid milk business, growing the organic and inorganic aspects of our business,” he says.
The integrated dairy centre will create a new income force. “We’ve seen other similar companies doing really well after starting an upstream production,” TA Securities’ Lye notes. F&N can draw upon the Vinamilk example. The Vietnam-based dairy company has seen leaps and bounds in its growth following its involvement in upstream milk insourcing.
Funding not an issue
F&N plans to allocate RM650 mil to develop the new land in Perlis, which will include the clearing and purchasing costs of Phase 1 of the project.
Nabil explains that a venture into dairy farming comes with challenges and is not an easy feat, given the failures of similar projects undertaken by other parties in the past. “With careful planning, we estimate that the dairy farming project could take at least five years before it can give a meaningful profit contribution to the group,” he notes.
Currently, F&N is evaluating various investment options to develop the upstream fresh milk operations. It expects to have its first production of fresh milk within 24 months of vacant possession.
“We are still looking at a sustainable farm model and are currently studying various options. Hence, more details, including the return on investment, will be shared in due course. The proposed acquisition will be funded via internally generated funds and/or external borrowings.
“The exact funding mix will be decided by the management of F&N at a later stage after taking into consideration F&N’s gearing level, interest costs as well as internal cash requirements for F&N and its subsidiaries’ business operations,” explains Lim.
Although there are challenges to the dairy farming project, cash will not be an issue for the group.
“As per its latest filing, the group is still on a strong net cash position. Hence, we do not expect that its gearing ratio will be severely impacted by this latest venture,” Nabil says.
“The group will not have any issue with funding. The company has a strong cash balance of RM569.72 mil as at Sept 30 and the borrowing is minimal,” Lye says. He believes that the group’s business direction for vertical integration would lead to meaningful results in the medium term.
In Phase 1 of the project, F&N will import 4,000 dairy cows with a potential output of 40 million litres of fresh milk per annum. Subsequent phases will take place upon stabilisation of Phase 1. In the longer term, Ladang Chuping will be capable of hosting 20,000 dairy cows to produce 200 million litres of fresh milk yearly, enabling the group to have the capacity to export fresh milk from being a net importer of fresh milk.
