Kim Eng on 8 Mar 2012
Upgrade to Buy. Singapore’s mass market residential property market has proven resilient, as evidenced by the January private home sales data released by the Urban Redevelopment Authority. Developer sales in the coming months are expected to still remain strong. Fraser and Neave (F&N) is thus in a sweet spot as a healthy take-up rate of its mass market projects will provide a secure earnings stream in the next three years. We upgrade our recommendation to Buy with the target price raised to $7.55.
In the right segment. We estimate property development to account for about a quarter of F&N’s group pre-tax profit for FY Sep12F. Singapore will be the key contributor, making up 50% of development sales, with Australia and China contributing the remainder. F&N’s development earnings are secure for the next three years as its pre-sold projects in Singapore carry unrecognised revenue of $1.4b. In addition, it has a supply of 2,785 unsold private residential units as at the end of last month. We believe that monetary liquidity, low interest rates and healthy demand for mass market projects will help F&N sustain its healthy take-up rates.
China policy loosening could lift sales. F&N has about $600m in unrecognised revenue from its pre-sold units across various projects in China and Australia. It still has about 5,200 units in Australia and 8,200 units in China to be sold over the next 5-8 years. As home prices in major Chinese cities experience a reasonable decline, purchase restrictions imposed by the central government could be lifted in the medium term. If so, this would spur the sales of F&N’s residential units in China.
Capital recycling opportunities abound. Income from F&N’s commercial properties (18% of pre-tax profit) is fuelled by strong occupancy of its 11 non-REIT retail malls (2.2m sq ft) in Singapore, as well as the steadily growing serviced residence portfolio (+7,000 rooms) in Asia Pacific and the Middle East. Its hospitality and retail portfolios provide a pipeline of assets for capital recycling.
Higher target price leads to upgrade. Better-than-expected sales momentum for F&N’s residential property projects and enhanced earnings visibility prompt us to peg our target price at a lower conglomerate discount of 5% to our SOTP valuation. Our target price thus increases to $7.55 from $7.05 previously, which warrants a rating upgrade to Buy.
Showing posts with label F and N. Show all posts
Showing posts with label F and N. Show all posts
March 8, 2012
February 13, 2012
Fraser & Neave
DBS on 10 Feb 2012
DBS Vickers Securities in a Feb 10 research report says: "Core net profit inched up 2% y-o-y although revenue dipped 11%. EBIT also dipped 2% to $264.3 million due to lower contribution from property development (-20%), dairy products (-84%) and soft drinks (-57%). Net asset value (NAV) is $4.99 per share.
"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 $8.48 RNAV. Target price of $7.20. MAINTAIN BUY."
February 10, 2012
Fraser and Neave
Kim Eng on 10 Feb 2012
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.
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.
January 10, 2012
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.
(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.
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