KUALA LUMPUR: CIMB Equities Research has forecast Fraser and Neave Holdings Bhd (F&N) to spend RM120mil in 2016 and RM200mil in 2017 to expand its operations.
It said on Friday that as the capital expenditure would be from its funds, it is not overly concerned given the group’s healthy operating cash flow generation of RM400mil and RM500mil per annum.
“While the group is not looking to raise its borrowings, we note that its current low gearing ratio of 0.2 times (as at 2QFY9/16) gives it plenty of headroom for future borrowings,” it said.
F&N’s new polyethylene terephthalate (PET) manufacturing line at its Shah Alam facility is set to be operational by June 2016, boosting the group’s PET output by 40% (or by an estimated 108 million bottles/year).
CIMB Research said this will mostly cater to the increased demand anticipated for the upcoming Hari Raya Aidilfitri celebrations as its current plant is running at almost-full utilisation rates, in its view.
F&N expects a new UHT line (which will be housed at the group’s existing soft drinks plant in Kuching, Sarawak) to be operational by October 2016. This expansion will cater to the rising demand in Sabah and Sarawak, and will also reduce certain logistics and freight costs, which should bode well for the group.
Construction of the group’s RM180m facility in Shah Alam, which will house a new warehouse and cold aseptic PET filling line, is slated to start in 3QCY16 and complete within the next 24 months. The new warehouse will help the group save approximately RM10m per annum as a result of cost efficiencies.
The new PET filling line would also decrease its consumption of PET resin packaging material by 40%, which would see more cost savings and reduction in utilities cost.
F&N will invest RM100mil in a new beverage plant within the Kota Kinabalu Industrial Park (KKIP) halal hub.
“We understand that the group’s current manufacturing facility in Kota Kinabalu is reaching full capacity and this move is necessary to meet the growing demand in East Malaysia. The new plant is slated to be up and running within the next six years.
“In terms of the raw material price outlook, we gather that milk prices have declined by around 11% YTD and 30% on-year. F&N revealed that it has fully hedged its raw material prices and forex requirements till the year end.
“Note that the group hedges a considerable portion of its US$ on its committed raw material purchases, only allowing for a small proportion un-hedged. Thus, we believe that it will continue to reap the benefits of lower milk prices and that margins should remain stable even if the US$ were to strengthen against the ringgit,” it said.
CIMB Research maintained an Add for F&N with the discounted cashflow-based target price revised to RM26.50
“Given the stronger-than-expected margin expansion on the back of lower input costs, we lift out FY16-18F EPS estimates by 5%-6.6%.
“We continue to like F&N for its strong execution capabilities, which have allowed the company to grow in spite of the overall weaker consumer environment.
“The stock is currently trading at attractive valuations of 18 times to 19 times FY16-17F price-to-earnings (P/E), which is below its five-year historical mean P/E of 22 times, and on the back of healthy three-year earnings CAGR of 18.6%,” it said.
F&N (3689) - CIMB Research forecasts Fraser and Neave to spend RM310m to expand
http://www.thestar.com.my/business/business-news/2016/05/06/cimb-research-forecasts-fraser-and-neave-to-spend-rm310m-to-expand/
