Published February 17, 2009

Can F&N refuel with food and beverages?

By EMILYN YAP

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FRASER and Neave (F&N) is widely known as a blue chip, but it does not look like the market's blue-eyed boy at the moment. The conglomerate's share price has been falling since January and it lost as much as 12 cents to close at $2.78 yesterday, after the release of its Q1 results last week.

Time to regain shine: With the property segment showing few signs of a quick and broad recovery, there seems to be no better time for the recession-resilient F&B arm to flex its muscles

Why has F&N lost its shine? Investors are most likely concerned about its large exposure to the cooling property sector. And as that segment shows few signs of a quick and broad recovery, it is now up to the food and beverage (F&B) business to carry the group back into the market's good books.

Analysts generally felt that F&N's latest results fell below expectations and cut the stock's target price to as low as $2.66. The group's Q1 net profit had dropped 18 per cent from a year ago.

But more discomforting are revaluations that could follow. CIMB analyst Donald Chua said there could be mounting pressure on F&N's balance sheet, pointing out that potential writedowns of properties in the UK and Australia could raise its net gearing ratio.

At 0.66 times as at end-2008, F&N's net gearing level is above those of other large property players such as Keppel Land (0.52) and CapitaLand (0.47).

There are also expectations that F&N will have to inject more capital into its unit, Frasers Commercial Trust. The trust's net gearing ratio as at end-2008 stood at 54 per cent and it has over $620 million due for refinancing this year.

F&N has cash, deposits and bank balances worth around $1.09 billion to support this move, but it also has debts amounting to $1.69 billion due this year. The group has secured financing of $1 billion so far.

With the property business in low tide, there seems to be no better time for the recession-resilient F&B arm to flex its muscles. While profit before interest and taxation for investment property and development property activities fell 44 per cent from a year ago, that for soft drinks, dairies, breweries and glass-container businesses actually rose 9 per cent.

F&N has also said for some time that it wants the non-property development businesses to grow faster and contribute more to earnings.

Some analysts are showing faith in the diversification effort. 'We expect F&B to continue to grow, especially breweries and soft drinks, and this will now be the mainstay of the group given property's troubles,' said Kim Eng's Gregory Yap in a note yesterday as he retained his 'buy' call.

Like the analysts, investors will be keeping a close eye to see if F&N revs up its F&B business to sustain growth. If this works out, the conglomerate could emerge stronger and more diversified to withstand future downturns.