SI Research: 3 Reasons It Is Time To Look At Fraser & Neave Again
Most Singaporeans should be familiar with Fraser & Neave (F&N). It is perhaps one of the oldest homegrown establishments with a long corporate history dating as far back to 1883 when it was first founded by John Fraser and David Chalmers Neave.
Originally set up to be a printing press, the founders diversified to pioneer the aerated water business in Southeast Asia. Through the decades, F&N brought to consumers a variety of beverage and dairy products that are still being enjoyed by the common households today.
According to historical data from Yahoo Finance, in its heyday, the stock (adjusted for any splits) rose to as high as $9.60 per share in 2013. After divesting its stakes in Asia Pacific Brewery, F&N returned capital of $3.70 per share to shareholders. Following which, in the same year, the group spun off its property arm Frasers Centrepoint (FCL) and shareholders got a dividend in specie distribution of two FCL shares for every F&N share they own. Each share of FCL had a book value of $2.04 then. After adjusting the stock for the capital reduction and dividend in specie exercise, the theoretical residual value for the F&N stock should have been about $1.82.
However, ever since F&N returned to focus on the beverages and dairies operations in 2014, its stock performance has been lacklustre. The stock is currently changing hands at $1.78 per share as at the time of writing.
After delving deeper into its financial performance in the latest 1Q19 earnings release, we noticed signs of turnaround and think that the market has yet to appreciate the value entrenched in the stock. Here are 3 reasons why investors should take a look to the stock before it becomes mainstream again.
Turning Around
Source: SGX Stockfacts
F&N’s latest 1Q19 earnings performance finally revealed signs of operational turnaround. In the latest quarter, F&N generated a net profit of $37.9 million on revenue of $464.4 million. While revenue was flat, the bottom line bounced 47.5 percent. Meanwhile, EBITDA margin further improved from 14.2 percent last year to 18.7 percent in 1Q19.
The improvements were underpinned by F&N’s dairies segment which was boosted by its added stakes in its associate company in Vietnam, Vinamilk. In addition, F&N dairies operations in Thailand are also beginning to ramp up, recording double-digit growth in export sales to Indochina on the back of distribution coverage expansion, while domestic sales in Thailand also increased following the successful execution of brand loyalty campaign.
On the beverages segment, revenue increased 7.6 percent on the back of strong activations and promotions for early sell-in for 2019 Chinese New Year period. Despite that, profitability waned and the segment reported a minor operating loss of $0.2 million. This was due to pre-operating costs incurred for Emerald Brewery Myanmar and overall increase in materials and manufacturing costs. The brewery in Myanmar, which is currently under construction, is slated to be ready for commercial production by late 2019.
Nonetheless, we could see that the group’s strategy to expand into emerging markets should yield better future rewards as competition is lower. After all, F&N’s success in Singapore and Malaysia was also founded on establishing itself as an early player before competition got intense.
Trading Below Book Value
Another attribute we like about F&N is its strong balance sheet. As of 1Q19, F&N holds cash and bank balances of $254.9 million while fixed deposits in banks amounted to $72.6 million. Together, cash and equivalents amounted to $326.5 million.
Meanwhile, total debt obligations were $662.2 million, which represented a net debt position of $335.7 million. Against shareholder equity of $2.9 billion, the group’s net debt-to-equity ratio of 11.7 percent would be pretty manageable.
On a short-term basis, $169.4 million of the total borrowings is due for repayment within a year. In the fast moving consumer goods business, fast turnover helps to keep F&N positive cash-flow generative. In 1Q19, owing to better profitability, net cash from operating activities improved to $32.5 million. Assuming no major capex in the upcoming quarters, management should have no problem paying off its obligation without undermining much of its cash position.
Meanwhile, at the current share price of $1.78 per share, the market is ascribing a market value of $2.6 billion to F&N, against its book value of $2.9 billion. On a per share basis, the stock is trading at 0.9 times price-to-book value or at a discount of 10 percent.
Undemanding Valuation
With performance in the core markets of Singapore and Malaysia seeing signs of stabilising, along with growth in the Thailand market, we see scope for F&N’s management to maintain dividend of $0.045 per share in FY19. Assuming F&N’s bottom line remains stable sequentially in the next three quarters, this would work out to be a payout ratio of around 40 percent of the $152 million in earnings. At the current share price, the stock would potentially reward investors with a decent dividend yield of 2.5 percent.
Meanwhile, based on trailing 12-month earnings, F&N is trading at a price-to-earnings (P/E) multiple of 19.2 times. Intriguingly, the group’s Malaysian subsidiary F&N Holdings Berhad is trading at a significantly higher multiple of 32 times compared to the Singapore parent. This led us to think that F&N could very well be flying under the radar amongst local investors.
