Fraser & Neave - Positioned for next stage of growth (KE)

Event

? Fraser & Neave (F&N) reported FY Sep11 revenue of $6.3b, which represented 10.1% YoY growth. While this was largely in line with our expectation and Street estimates, net profit was slightly disappointing at $620.6m (+6.2% YoY) due to cost pressures in the dairies division. We continue to expect the soft drinks, breweries and development property segments to spur earnings growth momentum in the future. Maintain BUY with the target price lowered to $7.22.

Our View

? Despite rising input costs, the soft drinks and breweries segments saw EBIT increased by, respectively, 38% YoY and 23% YoY in FY Sep11. We are encouraged by this robust growth and the corresponding margin improvements. From FY Sep12, two-third of the shortfall in soft drinks revenue from the expiration of the Coca-Cola agreement will be compensated for by the sale of F&N branded soft drinks in Singapore and Malaysia. In addition, the penetration of new markets (eg, Thailand, Vietnam and Indonesia) and launch of new products will underpin the F&B division’s next stage of growth.

? To gear up for growth in the soft drinks division, F&N has invested in a new PET production line (RM42m) and two new tetra pak production lines (RM50m). The completion of its state-of-the-art halal plant in Pulau Indah, Malaysia by year-end will also go a long way to aid its expansion.

? Development property EBIT slid by 3% YoY to $569m as property presale contributions in Singapore were offset by lower earnings from China. F&N still has a residential landbank of 2,327 units in Singapore and more than 10,000 units in China and Australia that can be unlocked over the next 3-5 years. Sales momentum looks set to slow down, but the group’s healthy balance sheet (31% net gearing) and risk-sharing among the partners for its projects should limit any strain on its cash flow.

Action & Recommendation

We lower our target price to $7.22, from $7.47, to reflect the higher 10% conglomerate discount (from 5%) ascribed to our SOTP estimate of $8.02. Key catalysts include the potential divestment of the non-core businesses, such as printing and publishing, and the expansion of the F&B businesses into new markets. Maintain BUY.