1QFY12 marginally below on timing, flood impact. Core net profit inched up 2% y-o-y although revenue dipped 11%. EBIT also dipped 2% to S$264.3m due to lower contribution from property development (-20%), dairy products (-84%) and soft drinks (- 57%). Weaker soft drinks contribution was due to cessation of its Coca-Cola bottling agreement in Malaysia. However, the net impact was mitigated by strong EBIT from breweries (+30% to S$158m) and investment properties (+9% to S$68.2m). F&B accounted for 62% of Group PBIT (1Q11: 60%). NAV is S$4.99/share.
Property development to pick up slack. The weaker 1Q contribution was due to timing of profit recognition in Singapore. We estimate it will recognise S$0.8bn development revenue from Singapore in FY12F. Despite recent property cooling measures, its latest residential launch at Punggol Watertown saw over 800 options issued, and will drive future profits. The Group will continue to replenish its landbank regularly, especially through government land tenders.
Recommendation
Maintain Buy and S$7.20 TP (15% discount to RNAV). Despite hiccups in 1QFY12, development profits should
pick up q-o-q, while its Thai diaries plant will gradually recommence production. Insurance claims will cover financial losses incurred during the recent floods in Thailand. The Group’s diversified revenue structure and its F&B and investment properties will continue to offer stability vis-à-vis cyclical development properties. Current valuation is undemanding at 1.2x P/BV and 24% discount to our S$8.48 RNAV.
Core earnings in 1Q12 (S$148m) was within expectations at 29% of our forecast; 21% of consensus. We raise our target price (15% disc to SOP) and adjust our FY12-14 core EPS by +17%/-6% to factor in changes to our presales recognitions estimate and accretion from recent land wins.
Breweries electrify but soft drinks face gestation
Beer revenues rose 17% yoy to S$620m in yet another strong showing. Key markets in Vietnam, Indonesia and PPNG continue to perform. Overall PBIT in the brewery segment grew 30% yoy to S$159. Fortunes in the non-beer segment though were less positive. Soft drinks revenues and volumes fell 18% and 13% respectively yoy in 1Q12, as life without Coke begins to show up in the numbers. Excluding Coke, sales would have grown 14% yoy, indicating that the group is progressing well in expanding its F&N products. We are confident that the void left by Coke will eventually be filled. Meanwhile, soft drinks revenues should stay depressed in 2012. Dairies revenue fell 26% yoy due to the Thai floods but production should be back on track in 3-4 months’ time.
Low property completions
Development revenue in 1Q12 fell 43% yoy to S$181m, a feature which could persist in FY12 due to the lack of project completions overseas. Presales on the other hand remain robust, with 800 options signed for Watertown and progressive sales seen in Australia. FNN announced that it has won the tender for a residential site at Bedok, through a JV with Sekisui House and Far East.
Tuning down optimism
The stock has beaten the FSSTI by 14% in 2011. Growth in breweries will continue to support valuations in 2012, but prospects appear more lukewarm for property and soft drinks. We see little scope for price performance at current levels.
TP of $7.05
Falling behind consensus. Fraser and Neave (F&N) reported a 1QFY Sep12 revenue decline of 11% YoY to $1.4b due to lower revenues from soft drinks, dairies and property. Recurring net profit grew by just 2% YoY to $151m. Overall, the results were below expectations and we believe that the business headwinds may delay the potential corporate restructurings that would support a share price re-rating. We reduce our earnings estimates by 20-24% for FY Sep12F-13F and downgrade our recommendation to Hold with a lower target price of $7.05 (total return: 12%).
Troubles come in battalions. Subsidiary F&N Holdings Bhd’s (FNHB) 62% drop in earnings for 1QFY Sep12 affected the group’s net profit. The poor numbers reflected the impact of the massive floods in Thailand and the cessation of the Coca-Cola franchise from 1 October 2011. Its Thai dairy unit reported an operating loss of RM12m while soft drinks revenue dipped 22% YoY and 27% QoQ in the absence of the franchise. Meanwhile, the Malaysian dairy unit continued to be affected by the reduced sugar subsidies in Malaysia as revenues fell 12% and operating profit plunged 75%. Breweries were the only bright spot for F&N.
Property earnings to support. Property development revenue dipped by 34% YoY to $181m in 1QFY Sep12 due to the effects of completed projects in Singapore and lower sales from overseas development projects. However, we expect pre-sold development projects such as Punggol Watertown, Seastrand and Boathouse to underpin earnings in the next two years. The group continues to replenish its residential landbank. It had submitted the top bid of $345.9m (or $534 psf ppr) for the tender for a site in Bedok South Avenue 3, which closed yesterday. This was only 1% higher than the second-highest bidder. We estimate RNAV accretion of $0.02/share for this project.
Downgrade to Hold on valuations. We believe that the acquisition of FNHB, a potential re-rating catalyst, is now in limbo due to its current rich valuations of 26x FY Sep12F PER. Nevertheless, the ongoing expansion of the food & beverage business, divestment of non-core assets such as Changi City Point and dividend yield of 2.4% should lend support to the share price. Our earnings forecasts for FY Sep12F and FY Sep13F are cut by 24% and 20%, respectively, to reflect slower sales from development projects and lower dairies profits. Downgrade to Hold.
52 Weeks Range 5.250 - 6.930
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