(April 13, RM15.98)
Maintain buy at RM15.96 with revised fair value RM17.40 (from RM17.20): We re-affirm our “buy” rating on Fraser & Neave (F&N) with a higher fair value of RM17.40 (against RM17.20 previously) based on a price-earnings ratio (PER) of 18 times CY11F earnings, after raising our FY11F to FY13F earnings forecasts by 4% to 6%.
We expect F&N to continue to benefit from robust consumption trends, in light of sustained sales volume growth seen thus far. We remain bullish about the group’s earnings prospects for its key soft drinks and dairy businesses, well underpinned by: (i) juice beverages product expansion and; (ii) capacity boost from upcoming RM350 million Pulau Indah dairy plant. The manufacturing hub is set to alleviate supply constraints for the local and export markets upon commencement by end-2011.
Admittedly, we expect some margin normalisation owing to rising raw input costs. As an indication, prices of whey, skim milk, and aluminium have surged 16% to 22% year-to-date. However, the strengthening ringgit and sustained volume expansion should partially mitigate the risk of volatile prices. Alternatively, the group should be able to pass on additional costs, if necessary by leveraging on its market share leadership and strong brand equity.
Core operations aside, we believe potential earnings accretive M&A is a wild card which would provide some excitement over the medium term. We reckon food-based businesses remain a key area of interest as F&N seeks to increase its exposure to other F&B segments, in addition to its 23% stake in Cocoaland Holdings.
Net cash as at Dec 31, 2010 was a strong RM846 million. In the absence of a suitable target, investors can look forward to special dividends. Free cash flow for FY11F is an estimated RM235 million (70 sen per share).
Further ahead, a structural earnings transformation is inevitable as property development in its Petaling Jaya mixed commercial project kicks off, upon relocation of operations to Pulau Indah.
The 12.7-acre (5.1ha) factory land has an estimated gross development value of over RM1 billion, with Phase I comprising commercial and residential properties to commence in 2012. We have yet to factor this into our earnings model.
Our valuation continues to peg the raised CY11F earnings to a PER of 18 times — close to the stock’s three-year historical average of 17 times. We continue to like the stock for its strong fundamentals in a sustainable food industry, as proven by its consistent earnings delivery track record. — AmResearch, April 13
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