F&N’s pursuit of efficiencies to mitigate challenging landscape
KUCHING: Fraser and Neave Holdings Bhd’s ( F& N) flattish sales from a challenging spending landscape and constant fluctuations in productions costs are expect to dampen prospects in its performance, but Kenanga Investment Bank Bhd ( Kenanga Research) believes the group’s pursuit of several efficiencies can mitigate this.
For the first nine months of 2018 ( 9M18), F& N’s sales of RM3.11 billion was flattish across both F& N Malaysia and F& N Thailand segments due to slow spending trends.
The group’s sales dropped earlier this year during the second quarter of the financial year ( 2QFY18) prior to the implementation of the zero-rated GST as dealers and distributers destocked their inventory levels.
And MIDF Amanah Investment Bank Bhd ( MIDF Research) believes that this activity would likely take place to re-occur in 4QFY18 due to the upcoming implementation of the new SST which will be in effect on September 1, 2018.
In order to mitigate these effects, Kenanga Research highlighted in a results note that the group’s new product innovations would be expected to be the primary strategy for capturing a larger market share and increasing sales.
Its heavy investments into better machinery could also soon translate into better economy of scale to offset the unpredictable production costs and this could be further boosted by F& N’s recent restricting exercises that has shown better streamlined overheads.
And while the recent weakening of the Ringgit has increased the group’s input cost exposure in its production in areas such as materials of diary and packaging, Kenanga Research argues that there could be some upside to a weaker local currency.
“On the flipside, the group may still benefit from weaker domestic currency as more than 50 per cent of its sales are transacted in foreign currency, whilst production costs are assumed to have a 40 per cent exposure,” they said.
For 9M18, F& N’s core net profit of RM318.8 million was a - 6 per cent decrease year over year ( yo-y) and accounted for 82 per cent of consensus full-year estimates. This broadly within expectations due to poor seasonality typical of the 4Q period.
All in, both Kenanga Research and MIDF Research are maintaining their ‘Underperform’ and ‘Sell’ calls on the stock with unchanged target prices RM32.15 and RM28.30 respectively.