8 things to know about F&N Holdings Berhad before you invest

Fraser & Neave, Limited (F&N) (SGX: F99) is among the oldest companies in Southeast Asia. Its roots can be traced back to 1883. In that year, John Fraser and David Chalmers Neave formed the Singapore and Straits Aerated Water Company to venture into the aerated water business. It was also to diversify from their printing business under the Singapore and Straits Printing Office. Years later, in 1898, the two partners formed a new public company known as Fraser & Neave, Limited. The two businesses were then sold to their newly-formed company.

In the 1930s, F&N had started to be more active in the food & beverage manufacturing industry. In 1931, it formed a joint venture with Heineken N.V. to set up Malayan Breweries Limited which is now known as Heineken Asia Pacific. In 1936, it acquired franchise rights to Coca-Cola. Subsequently, it acquired franchise rights to Pepsi, 7-Up, and Fanta. Since then, F&N has inked numerous major corporate milestones, including the pioneering of condensed sweetened milk in 1959 and the launch of 100PLUS isotonic drink in 1983.

In 1996, Fraser & Neave Holdings Berhad (F&NHB) (Bursa: 3689) was formed following the restructuring of the Group’s Malaysian soft drinks, dairies and glass businesses. (The glass business was subsequently divested in 2010.)

Today, F&NHB is a leading F&B manufacturer in Malaysia with significant presence in Thailand. It has built a portfolio of 24 household brands such as 100Plus, F&N, Carnation, Seasons, and Gold Coin. As I write, F&NHB is worth around RM9.0 billion in market capitalization.

In this article, I’ll bring a detailed account of F&NHB’s tremendous success over the last 10 years, the challenges it currently faces, and its developments to sustain future growth.

Here are…

8 things to know about F&N Holdings Berhad

1. On 30 September 2011, F&NHB’s franchise agreement to distribute Coca-Cola products expired. This caused revenue from F&N’s operations in Malaysia to fall from RM2.88 billion in 2011 to RM2.40 billion in 2012. Since then, F&N Malaysia has focused on selling its core products. This contributed to marginal growth in revenues, from RM2.40 billion in 2012 to RM2.59 billion in 2015, before falling slightly to RM2.53 Billion in 2016. The dip was due to the rights to distribute Red Bull products which expired in September 2015.

Source: F&N Holdings Bhd annual reports

2. F&N’s operations in Thailand is a key growth driver for F&NHB. In 2009, F&N Thailand built a RM250 million dairy plant at the Rojana Industrial Estate. This plant can produce up to 3.5 million cans a day, thus, making it the largest in the region. In 2012, F&N Thailand was hit by floods which caused a 200-day cessation on its manufacturing activities. F&N Thailand revenues declined from RM975.0 million in 2011 to RM770.6 million that year. Since then, F&N Thailand has recovered and expanded its exports to Cambodia, Myanmar, Laos, and Vietnam. This has seen revenues grow from RM770.6 million in 2012 to RM1.64 billion in 2016.

Source: F&N Holdings Bhd annual reports

3. Overall, F&NHB has achieved a CAGR of 7.93% in group revenues over the last 10 years. It increased from RM1.94 billion in 2006 to RM4.17 billion in 2016. This was contributed by sales growth achieved from F&N Malaysia and F&N Thailand during the 10-year period.

Source: F&N Holdings Bhd annual reports

4. F&N Bhd has achieved a CAGR of 10.44% in shareholders’ earnings over the last 10 years. It’s grown from RM142.8 million in 2006 to RM385.4 million in 2016. If you notice in the chart below, F&NHB reported record high earnings of RM695.3 million in 2010. This was contributed by the RM382.0 million gain on disposal of the group’s 100% interest in Malaya Glass Products Sdn Bhd on 14 May 2010. Excluding this one-off gain, F&NHB’s earnings would be around RM312 million which is in line with its earnings trajectory over the last 10 years.

Source: F&N Holdings Bhd’s annual reports

5. F&NHB has a five-year return on equity average of 16.62%. I used a five-year period as it is better to assess F&NHB’s ability to generate profits after the disposal of Malaya Glass Products Sdn Bhd and the cessation its Coca-Cola franchise rights in September 2011. Overall, it is still a healthy figure.

6. F&NHB has generated RM3.31 billion in cash flows from operations over the last 10 years. As at 30 June 2017, the group has RM403.4 million in cash reserves, a current ratio of 2.35, and a debt-to-equity ratio of 0.19.

Source: F&N Holdings Bhd’s annual reports

This has enabled the group to pay out RM2.37 billion in dividends to its shareholders during the period. F&NHB has maintained its dividend at RM0.55-0.60 per share over the last five years. As at 29 September 2017, F&NHB is trading at RM24.66 a share.

 20122013201420152016
Dividend per share (in Malaysia sen)58.0 60.0 55.057.557.5

If F&NHB is able to maintain its dividend per share at RM0.575, its expected dividend yield is around 2.3%.

7. F&NHB has some key risks and the management has provided discussions on how to mitigate their impact on the business performance. They include:

  • F&NHB faces the risk of fluctuating commodity prices and foreign exchange losses. The management hedges 60% of its foreign exchange requirements and plans to grow its export markets to offset the impact from the depreciation of local currencies.
  • The management recognizes the possibility of a sugar tax being imposed on sweetened beverages. However, F&NHB believes that it can sidestep the issue as it has been reducing the sugar content of its products since 2004. For instance, 100PLUS, its best-selling product, has 40% lower sugar content than other carbonated soft drinks in the market.

8. Moving forward, F&NHB aims become the “No. 1 Total Beverage Company in Malaysia by 2020”. The management has revealed numerous projects to sustain future growth:

  • In 2016, F&NHB announced over RM300 million in capital expenditures over the next two years to enhance cost efficiency and productivity. This includes a new 300 million baht filling and packaging line for evaporated milk in Rojana, a RM30 million UHT line in Kuching, a RM45 million PET line and a RM180 million warehouse in Shah Alam, and multiple expansionary projects in Bentong.
    In 2017, F&NHB announced an additional RM200 million in capital expenditures. This includes a 600 BPM (bottles per minute) water line and combi-blow, mold, & filling machine in Shah Alam, and a sweetened condensed milk pouch & tube filling line in Rojana.
  • On 4 July 2017, F&NHB and McDonald’s Malaysia officially announced that 100PLUS is now available at all 261 McDonald’s restaurants across Malaysia. It is a milestone achieved for 100PLUS as it is the first F&N product to be served at a quick-service restaurant network in Malaysia.
  • F&NHB extended its export market from 49 countries in 2016 to 54 countries in May 2017. At present, export sales is the third pillar of growth, accounting for more than 10% of the group’s revenues. The management is intensifying export sales through customization of product offerings, innovations in packaging, and leverage on its halal status to tap into more Muslim nations worldwide.

The fifth perspective

In summary, F&N Holdings Berhad has built a track record of increasing sales and profits and consistent dividend payouts to shareholders over the long term as it evolves into the leading total F&B organization in Southeast Asia.

Ian Tai is the founder of Bursa King, a data platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that helps investors unearth consistently profitable stocks from a database of over 900+ stocks listed in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

Leave a Reply

Your email address will not be published. Required fields are marked *