RAM Ratings: Sugar tax implementation may hurt F&N

KUALA LUMPUR: The recentlyannounced excise duty on sweetened beverages will likely post a challenge to Fraser & Neave Holdings Bhd’s (F&N Holdings) soft-drinks operations, which contribute almost 30 per cent to its revenue, says RAM Ratings.

However, the agency said this would not have an immediate impact on the group’s ratings.

Effective April 1 next year, a 40 sen tax per litre would be imposed on drinks containing more than five grammes of sugar or sugar-based sweetener per 100 millilitre, as well as fruit and vegetable juices with sugar content of more than 12 grams per 100 ml.

RAM Ratings said the razorthin operating margins of F&N soft-drinks business would leave little room for it to absorb cost increases without affecting its profitability. Therefore, it expects the heftier costs to be mostly passed on to consumers through higher prices.

“If the sugar tax is fully passed on, the selling prices of the group’s key beverage products are estimated to rise between 10 sen and 60 sen.

“Despite the minimal quantum of price increases, we expect demand to be negatively affected in the near-term,” it said.

Over the longer term, RAM Ratings expects growth of the ready-to-drink market to stay subdued, largely driven by sales of bottled water, in line with rising consumer health awareness.

Nevertheless, it expects F&N’s dairy operations in Malaysia and Thailand would anchor the group’s performance, as was the case in fiscal 2017 and 2018.