Analysts cautious on F&N’s short-term prospects, future growth may be dragged by higher costs
KOTA KINABALU: Following Fraser & Neave Holdings Bhd’s (F&N) first half of 2018 (1H18) briefing, analysts are now cautious on the group’s short-term prospects, in addition to observing that future earnings growth may be dragged by higher costs.
According to the research of Kenanga Investment Bank Bhd (Kenanga Research), challenges are from slowing demand in both Malaysia and Thailand, diminishing gains from weakening foreign currency and operating cost pressures.
“While Malaysian demand could still be affected by intense price competition in the soft drinks market, sales in Thailand could be clouded by softening local spending possibly arising from the rise in fuel prices,” Kenanga Research said.
“While it is possible that these challenges may persist in the short term, management aims to continue staying relevant by ramping up on marketing exercises and introducing new product innovations.”
On another note, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) expected that the prices of milkbased commodities and packaging material costs will continue to rise.
“For instance, skimmed milk powder has increased by 17.6 per cent year to date (YTD) to US$2,000 per metric tonne,” MIDF Research said.
“Meanwhile, advertising and promotional expenses is estimated to be higher in FY18 to spur consumer spending during Ramadhan and Hari Raya season in Malaysia.”
Kenanga Research highlighted that while export volumes are on the rise, total returns could diminish following the recovery of the ringgit.
“It is estimated that domestic Malaysian sales account for circa 50 per cent of group revenue, while 35 per cent and 15 per cent are derived from sales in Thailand and other exports market, respectively.”
Normalising for forex, the research arm estimated financial year 2018 (FY17) export growth to linger at circa 25 per cent, without which saw a 32 per cent increase.
“Unless sales volumes pick up significantly, a stronger ringgit environment would be less favourable for the group.”
Kenanga Research’s in-house estimate for the average US dollarringgit rate in current year 2018 (CY18) stood at RM3.90 per US dollar.
While operating expenses are easing following the restructuring exercise implemented in FY17 and capital expenditure (capex) plans to resolve bottleneck issues and expand manufacturing capabilities are in place, Kenanga Research believed the inability to regain consumer demand in key domestic segments may lead to cost overrun.
“On the other hand, marketing spend may continue to be aggressive in order to capture the said demand.”
On a more positive note, Kenanga Research highlighted that the group is slowly building towards a strong foundation to achieve longer term growth objectives in the form of new product offerings and better production capabilities.
The research arm further highlighted that product innovations are leaning towards healthier options such as 100Plus Less Sugar which could tap into more conscious consumers.
“The group continues to aspire to expand its export base to contribute RM800 million by FY20 and may undertake more aggressive strategies to achieve the milestone.”