Sugar tax not ex­pected to have im­me­di­ate im­pact on F&N

The Star Malaysia - StarBiz - - News -

KUALA LUMPUR: The gov­ern­ment’s de­ci­sion to im­pose ex­cise duty on sweet­ened bev­er­ages is a neg­a­tive de­vel­op­ment for Fraser & Neave Hold­ings Bhd (F&N Hold­ings), says RAM Rat­ings.

How­ever, it said yes­ter­day it does not ex­pect the ex­cise duty to have an im­me­di­ate im­pact on the group’s rat­ings.

The ra­zor-thin op­er­at­ing mar­gins of F&N Hold­ings’ soft-drinks busi­ness leave lit­tle room for it to ab­sorb cost in­creases with­out af­fect­ing its prof­itabil­ity.

“As such, we ex­pect its heftier costs to be mostly passed on to con­sumers through higher prod­uct 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 (based on the ex­ist­ing prices of RM1.20-RM3.40 for 250 ml to 1.5 litre drinks),” it said.

As an­nounced in Bud­get 2019, a 40 sen tax per litre will be im­posed on drinks con­tain­ing more than five grams of sugar or sugar-based sweet­ener per 100 ml, as well as fruit and veg­etable juices with sugar con­tent of more than 12 grams per 100 ml. The “sugar tax” will take ef­fect on April 1, 2019.

“This will af­fect F&N Hold­ings’ soft-drinks op­er­a­tions, which con­trib­ute al­most 30% of the group’s rev­enue.

“Most of F&N Hold­ings’ wide ar­ray of bev­er­ages (i.e. iso­tonic bev­er­ages, car­bon­ated soft drinks, Asian soft drinks, tea, green tea, juice and wa­ter) in the ready-to­drink (RTD) mar­ket will be sub­ject to the tax. This in­cludes 100 Plus (reg­u­lar vari­ant), the largest sales and profit con­trib­u­tor in the group’s soft-drinks di­vi­sion,” it said.

RAM Rat­ings said de­spite the fairly min­i­mal quan­tum of price in­creases, it ex­pects de­mand to be neg­a­tively af­fected in the near term amid con­sumers’ knee-jerk re­ac­tion.

This will partly negate the im­pact from the gen­er­ally more up­beat sen­ti­ment since the Pakatan Hara­pan gov­ern­ment came into power in May 2018.

“Over the longer term, we ex­pect the growth of the RTD mar­ket to stay sub­dued and largely driven by sales of bot­tled wa­ter, in line with con­sumers’ in­creas­ing health aware­ness,” it said.

No­tably, the bot­tled-wa­ter seg­ment is the only RTD sub-seg­ment that reg­is­tered a pos­i­tive vol­ume growth (+2.1%, by litre) in 2017.

This con­trasts against the over­all RTD mar­ket’s 5.5% con­trac­tion last year (2016: +3.8%) amid muted con­sumer sen­ti­ment and the spi­ralling cost of liv­ing.

F&N Hold­ings’ soft-drinks op­er­a­tions have been sig­nif­i­cantly af­fected by the com­pet­i­tive op­er­at­ing land­scape, weak con­sumer sen­ti­ment and ris­ing liv­ing costs in the last two years.

The im­ple­men­ta­tion of the sugar tax may ex­ac­er­bate com­pe­ti­tion; big play­ers such as The Coca-Cola Com­pany pos­sess deep pock­ets and have launched ag­gres­sive cam­paigns to wrest mar­ket share in the last few years.

“Given this, we do not ex­pect the op­er­at­ing per­for­mance of F&N Hold­ings’ soft-drinks di­vi­sion to im­prove mean­ing­fully any­time soon.

“That said, the group’s dairy op­er­a­tions in Malaysia and Thai­land are an­tic­i­pated to an­chor its per­for­mance, as was the case in fis­cal 2017 and 2018.

“Even with a fur­ther weak­en­ing of its soft-drinks busi­ness, we en­vis­age the group’s bal­ance sheet and cash­flow-pro­tec­tion met­rics to re­main strong, with a net-cash po­si­tion and a funds from op­er­a­tions debt cover of close to one time,” it said.

With this new de­vel­op­ment, RAM Rat­ing ex­pects F&N Hold­ings to speed up its R&D ef­forts to re­duce the sugar con­tent in its bev­er­ages.

In June 2018, the group launched a lower-sugar vari­ant of 100 Plus (which falls out­side the scope of the im­mi­nent sugar tax). None­the­less, this vari­ant ac­counts for just a small por­tion of its over­all 100 Plus sales.

F&N Hold­ings’ RM750mil MTN Pro­gramme (2013/2028) and RM750mil CP Pro­gramme (2013/2020) are is­sued by its fund­ing con­duit (i.e. F&N Cap­i­tal Sdn Bhd) and carry re­spec­tive rat­ings of AA1(s)/Sta­ble and P1(s).

The debt fa­cil­i­ties are backed by full, un­con­di­tional and ir­rev­o­ca­ble cor­po­rate guar­an­tees from F&N Hold­ings. As such, the is­sue rat­ings re­flect the credit pro­file of the group.

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