Fraser and Neave - Nomura

3QFY10 results luncheon - key takeaways


Kirin likely to be invited to the board. F&N believes that Kirin can add value to the group and will be looking to invite the company to its board. F&N respects Kirin’s strong product development capability and its array of products from beer to soft drinks/dairy products across Asia. F&N has already been associated with Kirin distributing its beer and dairy products in South East Asia. Areas that F&N can work with Kirin include Asian teas and coffee.

Plugging the gap from loss of Coke franchise. Management indicated that Coke products form about RM 500m or about 30% of the softdrinks revenues of F&N Holdings Bhd, its Malaysian subsidiary. F&N is confident about replacing the lost sales with the new Red Bull distribution contract (sales of at least RM 120m annually), market share gains in the Singapore market once the territory reverts back to F&N, and export sales. In addition, the group is introducing more product ranges to further segment the market and capture market share. On operating performance of the softdrinks division, F&N commented that the current quarter will likely be strong as Ramadan occurred in this quarter. Although sugar prices have increased with the recent reduction of subsidies in Malaysia, the company did not experience the full impact.

Tapping growth in Indonesia with 100 plus. F&N is excited about the growth potential in Indonesia and has announced that it will launch its Isotonic Drink 100 plus in Indonesia. Although this market segment is still small, it is growing and therefore the opportunity is promising. The group believes that in the longer term, 100 plus can be as successful in Indonesia as in Malaysia where it is the number one soft drink. In the meantime, management believes that 100 plus can replicate its Malaysian success in Singapore sooner.

Dairies seeing higher costs but likely to be passed. The last quarter saw margins from its dairies division impacted by higher milk powder costs. Management believes that the costs increases will inevitably have to be passed on.

Beer is performing well, especially with Indonesian acquisition. The 3Q results show continued strength of its business across Asia with strong growth in Indochina and new contribution from Indonesia. On whether Asia Pacific Breweries (APB SP) would be keen on Fosters, much would depend on valuation. F&N does not believe in paying a premium valuation for mature growth.

Landbanking opportunistically in Singapore. F&N explained that the group has been bidding for land at prices that it is comfortable with. It believes that there is sufficient land supply available and it should therefore not bid too aggressively. It looks to have an inventory of between 1,500 to 2,000 units to keep a healthy pipeline of launches. On its Starhub Centre acquisition, management explained that the redevelopment will comprise 80% residential and 20% commercial. It is looking at ways to integrate the development with Centrepoint Mall so as to provide an “Orchard Road” access to residents. It will take at least 12 months before it is able finalise its plans.

Launching Central Park soon. F&N is looking launch phase 1 of the Central Park project in Sydney soon. About 3,500 people have registered interest in the 623 units put for sale at about A$900 to A$100psf. F&N is working with parties to develop the commercial components.

On restructuring. The group intends to sell Times Publishing but has not initiated any sale process as yet. It is looking to deploy the proceeds from the sale of its glass container business in Malaysia. Otherwise management conceded that M&A in the F&B space is difficult to execute due to valuations and lack of sellers. The group is happy to maintain its conglomerate

Nomura 1 19 August 2010

structure at this stage until such a time the F&B and property units become sizeable enough to require new capital to grow.

Valuation Methodology and Investment Risks: We value F&N on a SOTP valuation methodology - market prices for its listed stakes, Nomura NAV estimates for its property assets, 5x FY10 EV/EBITDA for Times publishing and FNN Foods. Our price target of S$6.55/share is derived after applying a 5% conglomerate discount to our NAV. Risks to price target: Changes to equity market risk premiums, as well as any unexpected improvement/deterioration in the outlook for the economy and physical real estate markets could see the stock trade above or below our SOTP NAV estimate.

Note: Ratings and Price Targets are as of the date of the most recently published report (http://www.nomura.com/research) rather than the date of this email.