10 things I learned from the 2020 F&N Holdings Berhad AGM

Fraser & Neave Holdings Berhad (F&NHB) is a beverage and dairy manufacturer and distributor listed on Bursa Malaysia’s Main Board. Its beverage and dairy brands are household names in Malaysia such as 100PLUS isotonic drinks, OYOSHI green tea, and CARNATION sweetened condensed milk.

It has three main business pillars: F&N Malaysia, F&N Thailand, and exports. Recently, it announced its plan to venture into integrated dairy farming and targets to build the business as its fourth pillar of growth.

Here are 10 things I learned from the 2020 F&NHB AGM:

1. Revenue increased 5.3% year-on-year to RM4.1 billion in 2019. Likewise, net profit excluding extraordinary items increased 7.5% to RM378.9 million. The growth was mostly due to the 11.3% increase in revenue from F&N Thailand. However, in Thai baht terms, the growth in revenue was 5.9% as the Malaysian ringgit depreciated by 7.3% against the Thai baht in 2019. On the flip side, the strengthening baht will affect the competitiveness of its exports. On a segmental level, F&N Malaysia posted flat revenues and a 4.2% contraction in operating profit year-on-year, while F&N Thailand’s operating profit grew 40.3%. F&N Thailand started paying corporate tax in 2019 after it finished using the tax incentives granted by the Thailand Board of Investment.

Source: F&N Holdings Berhad 2019 annual report

2. Shareholders pointed out that the operating profit margin at F&N Thailand is a lot higher than F&N Malaysia. CEO Lim Yew Hoe said this was due to the more focused product portfolio in Thailand that centres around sweetened beverage creamers and condensed milk. F&N Thailand owns around 80% market share for evaporated milk in Thailand and manages to achieve economies of scale in a larger country. Lim added that profitability is usually good for the top two players in Thailand for the food and beverage industry.

3. F&NHB has evolved its business as consumers become more health-conscious and the Malaysian government introduced a tax on sugar. Ninety percent of F&NHB’s ready-to-drink beverages currently sold in Malaysia are considered healthy options with sugar content below the taxable threshold of five grams sugar of per 100 millilitres of sweetened beverage. The Excise Department of Thailand has also progressively increased the sugar tax rate in sweetened beverages.

4. F&NHB is planning to invest approximately RM650 million to acquire 4,454 hectares of land in Chuping, Perlis to establish an integrated dairy farm. F&NHB aims to venture into affordable fresh milk production as its fourth pillar of growth. F&NHB’s existing downstream businesses will also be supported by the insourcing of fresh milk. In the near term, F&NHB will import 4,000 milking cows and produce 40 million litres of fresh milk annually. Within 20 years, it aims to spend another RM600 million to rear 20,000 milking cows with an annual output of 200 million litres of fresh milk. Malaysia currently produces 30 million litres of fresh milk a year as a whole.

5. Local fresh milk and imported milk powder currently contribute to 3% and 97% of the total dairy needs in Malaysia respectively. Local fresh milk is expected to gradually replace imported milk powder from countries like Vietnam and China. The management has done its studies on confined dairy farming and cropping for two years and will employ an experienced multidisciplinary team to manage the farm. On a separate note, dairy farming in Thailand is highly regulated and the industry mainly comprises small dairy farmers. F&NHB will not invest in dairy farming in Thailand and currently sources 80 million litres of fresh milk from the farmers there annually.

6. Although F&BHB’s dividend per share increased from 57.5 sen in 2018 to 60.0 sen in 2019, a shareholder pointed out that the dividend payout ratio decreased slightly (from 59.8% to 58.1%). Lim said that cash is set aside for strategic opportunities such as the integrated dairy farming project which could bear dividends for shareholders in the future.

7. F&NHB is investing in automation to lower its cost per unit of production. It is building a new integrated warehouse with an automated storage retrieval system and which has a capacity of 50,000 pallet space in Shah Alam, Selangor.The warehouse is expected to be completed by 2021 and increase operational efficiencies. It can save between RM8 million and RM12 million a year from insourcing warehousing needs. Chilled and UHT production lines are being constructed in Pulau Indah, Selangor to replace the currently outsourced fresh milk and juices production to control cost and quality. The lines are expected to be fully commissioned by June 2020 and will support the integrated dairy farming project up north.

8. The management declined to disclose revenue by brand when asked by a shareholder but the top revenue contributors are likely to be 100PLUS, CARNATION, F&N Fun Flavours, F&N SEASONS, OYOSHI, and TEAPOT based on the disclosure of its market leading positions in the annual reports. Lim shared that 100PLUS has about 90% market share while the company owns more than 55% market share in the condensed milk segment.

9. The company currently sells its products via its F&N Life app and website, and e-commerce players like Lazada and Jocom. As F&N’s products are low-priced in nature, it is more economical to deliver in bulk during festive seasons like Chinese New Year and Hari Raya. It will soon launch its products in Tmall.com and targets to earn RM10 million in revenue as well as benefit from the 2020 Alibaba Single’s Day. It targets to incorporate more lifestyle elements into F&N Life in the future such as step counts and other wellness incentives. The revenue contribution from online channels is negligible for now.

10. The market leader in juice only has 5% real juice in its content. On the other hand, F&N’s Sunkist Pure Orange juice contains about 35% of real orange juice (or six real oranges per litre). Fortified vitamins, artificial sugar, and naturally derived ingredients make up the rest of the juice. Lim said the company needs to balance between consumer needs and affordability as it releases healthier options with less artificial content. A one-litre bottle of fresh fruit juice could be priced at RM10, which is not really affordable to the mass public.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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