F&N

Kim Eng on 6 Jan 2012


(FNN SP, $6.28, Buy, TP $7.18)
Steadfast focus on property in past decade. Fraser and Neave (F&N) is one of Singapore’s oldest listed blue chip companies and has undergone numerous transformations in the last 128 years. From 2000 to 2007, the conglomerate focused steadfastly on the property market under the leadership of Dr Han Cheng Fong, its former chief executive officer (CEO). Dr Han was a property man through and through. Before F&N, he was the deputy chairman and CEO of DBS Land, which was merged with Pidemco Land in 2000 to form CapitaLand. During his seven-year stewardship, F&N’s non-property-related businesses took a back seat, profit-wise. By 2007, the food and beverage (F&B) segment, including beer and dairies, accounted for only 32% of total profit while soft drinks, the original core business, contributed a mere 6%.


Property in retreat but still a strong contributor. At the current cycle, property accounted for 55% of FY10 profit before tax. Due to the cyclical nature of the business, property counters generally trade at steep discounts to RNAV and only achieve a premium at their most bullish. For instance, at the height of the property market cycle in late 2007, F&N traded at a premium of close to 40% over its RNAV. But it was sold down to more than 40% discount to RNAV in early 2009. The group also has minority stakes in public companies such as Fung Choi Media (29.5% stake) but this move does not appear to have done shareholder value much good (even if it did, the flow of benefits has not been clear). We therefore believe that F&N as a conglomerate cannot fully realise its value for shareholders. The following are some options management had considered at some point and which we believe are worth pursuing.


Option 1: Shed weight through streamlining. Even though F&N has quite a number of non-core and strategically out-of-line assets and operations, we like the fact that the group constantly reviews its portfolio. Over the past 24 months, it has completed 12 divestments and asset injections into its sponsored REITs. Just recently, it sold its 29.5% stake in China Dairy Group for $38m. Other notable divestments include the sale of Shanghai Asia Pacific Breweries and Jiangsu Dafuhao Breweries for $162m, Bedok Point for $127m and a 21.4% stake in Kingway Brewery for $205m.


The next major asset to go could be F&N’s printing and publishing business, Times Publishing Group (TPG). In fact, TPG was put up for sale in August 2008. A deal was brokered but had to be aborted because the prospective buyer could not secure financing amid the adverse credit market conditions then. Private equity firms 3i Group and CVC Capital were reported to be among the bidders for this business that could have been sold for at least $400m.

Option 2: Break up the group. We would point out that speculations on the possibility of carving up the group have been denied time and again by F&N’s management at investor and shareholder forums. But we also keep in mind that all too often, corporate Singapore’s standard response to speculation has been “we have no plans to….” until it is ready to announce it, so the value of a denial is not what it used to be. Up the ante on food and beverage. There is a valuation argument to be made for a refocus on F&B. A peer comparison shows that wellfinanced F&B companies with established brands and high ROEs in the region are valued by investors. Nestle (Malaysia), for instance, trades at 27x forward earnings. For the F&B business to stand on its own (assuming the sale of the publishing business), it makes sense for F&N to take full control of FNHB and consolidate the earnings based on a 100% interest in the Malaysia-listed entity.


Based on the current market price for FNHB, the remaining 42.6% interest in the company which F&N does not own carries a price tag of $846m (net of cash and debt). F&N’s group cash balance of $1.7b as of June 2011 includes $900m in unused cash that Temasek Holdings paid to F&N in 2006 for the 14.7% it took. This, coupled with the $4.8b in banking facilities provided by eight relationship banks and $3.4b in Medium Term Note Programs, should provide more than sufficient funding for a major corporate acquisition such as FNHB.


In the meantime, F&N is working to broaden its F&B business. Besides launching new brands and categories of soft drinks for both the export and domestic markets under the soft drinks division, the group is boosting its dairies and ice cream businesses. In October 2010, it acquired a 100% interest in King’s Creameries, a significant ice cream player in Singapore and Malaysia which markets its products under the flagship brand King’s. In August 2010, it ventured into the snack food business, paying RM54.6m for a 23.1% stake in Cocoaland Holdings (listed on Bursa Malaysia), which manufactures and distributes juices.


F&N a takeover target? Never say never. Another value-enhancing factor to the F&B business is F&N’s exposure to the attractive breweries business through its 39.7% stake in Asia Pacific Breweries (APB). F&N and Dutch brewer Heineken hold equal stakes in Asia Pacific Investments Pte Ltd, which, in turn, owns 64.8% of APB. Separately, F&N and Heineken have direct stakes of 7.3% and 9.5%, respectively. In our view, there is unlikely to be a change to the APBHeineken stalemate unless F&N undergoes a massive restructuring.


To recap, the market has long speculated that Heineken may launch a hostile takeover bid for APB against its strategic partner and fellow shareholder F&N, or even try to take over F&N itself. The Dutch brewer had been frustrated by a 1931 agreement that forbade it from setting up breweries in Asia except through APB (which, for obvious reasons, is keener on promoting its own Tiger brand). Heineken had a run-in with F&N and APB in 2006 when it sued the duo over the right to appoint the CEO to run the China operations, and we suspect the speculation may have its roots in that event. Further, Heineken has made it no secret that it desires a larger stake in APB, if the price is right.


A Heineken takeover attempt of F&N is more likely only if F&N disengages itself from businesses that are unrelated to beer and which Heineken will not be interested in, namely, property, printing and publishing, and soft drinks.


However, there is a reason why a takeover bid by Heineken may not happen so easily: The entry of Japanese brewer, Kirin Holdings, as a major shareholder could act as a shield against a hostile move by Heineken. For that matter, F&N may even find itself being the subject of a tussle for control between Kirin and Heineken should they decide to attempt a takeover.


Relisting property business at the right price. F&N’s property business is no small affair. It has 15 residential projects currently under development, a landbank of 30m sq ft (estimated gross development value of $10b), more than 25 commercial properties and over 69 serviced residence properties across 23 countries. Revenue and PBIT for property hit a record high in FY Sep10 at $1.9b and $0.6b, respectively.


F&N paid below-NTA valuation of 0.93x P/NTA to privatise Centrepoint Properties in 2001. While it may be possible to relist its property business, we view this as a longer-term catalyst given that the average valuation for blue chip property stocks like CapitaLand, Keppel Land and City Developments currently stands at just about 1x NTA compared to bull market valuation of around 2x NTA. All said, it is evident that there are numerous ways for F&N to extract greater value for its shareholders and staying as a conglomerate is by no means the best option.