As F&N owns 57.9% of F&NB, we estimate that the impact on FY10 earnings will be 3.2% (from $447.4m to $433.3m) and 5.3% for FY11 (from $408.8m to $387.1m). As our RNAV model is based on F&NB’s fair value (to be determined), we estimate every 30 sen decline in F&N Berhad’s share price will lower our RNAV valuation by 1 cent.
Although the financial impact is not very large, the impact on sentiment will be more significant as F&N is increasingly reliant on F&B to drive growth. In addition, both companies may cut dividends, as cashflow may be affected. F&NB typically pays out more than its earnings to shareholders. Further, F&N’s balance sheet is already stretched by the need to refinance substantial borrowings this year.
F&NB may be able to recoup some one-off returns from Coca Cola, depending on Coke’s future bottling plans in Malaysia. If it decides to set up its own plant, it may buy equipment from F&N, which would trim the financial impact. Also, F&N will now be able to launch new products and expand into new geographical markets with Coke out of the picture. However, it is still unclear how this will work out.
We downgrade F&N to Hold in light of this development. For now, the stock will be affected by the damage to sentiment and the risk of dividends being affected. Historically, the stock has traded to a low of 9x earnings during the Asian crisis. Assuming the same trough valuation, we set our fair value at $2.15.
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