Fraser & Neave Holdings Bhd (F&N)
(Feb 9, RM10.50)
Maintain buy at RM10.60, target price at RM13.25: We expect F&N to release above-expectation results for the first quarter of financial year ending September 2010 (1QFY10) by this month-end.

A number of positive developments will provide upside catalysts to its share price. This could include F&N’s acqusition of international brands to sell and distribute, while its non-core glass container  division could be rationalised. We maintain our buy call with an unchanged target price of RM13.25.

Yeo Hiap Seng (M) Bhd last month said that its contract to sell and distribute Red Bull products in Malaysia would end on April 1, 2010. Red Bull products had contributed revenue and operating profit of RM99.6 million and RM870,000 respectively, for the 12-month period to Sept 30, 2009. F&N could benefit if it wins the manufacturing contract for Red Bull in Malaysia, besides the sales and distribution rights for the beverage brand.

Red Bull originated from Thailand and continues to be manufactured there, leading to a certain level of “grey” imports direct from Thailand. Without a manufacturing and just a sales and distribution contract for Malaysia, F&N could record up to RM200 million in sales and an operating profit of between RM4 million and RM6 million, translating into just 3% to 4% of its projected soft drinks operating profit in FY10.

On Nov 25, 2009, F&N announced the strategic review of its glass container division. F&N’s increasing focus on dairy products and soft drinks that use fewer glass containers implies that F&N may sell its glass container business. Such a move will be more beneficial than acquiring the distribution contract for Red Bull, though both are positive developments.

We expect continued positive developments and earnings throughout FY10. We tweak our FY10 to FY12 forecasts by  -1% to 2% post annual report disclosures. Our RM13.25 target price is based on a calendar year 2011 price-to- earnings ratio (PER) of 17 times, which is the high-end of its average trading valuation over the last three years. — Maybank Investment Bank Research, Feb 9


This article appeared in The Edge Financial Daily, February 10, 2010.