F&N - Property development paled in comparison to F&B

3Q09 revenue grew 12% YoY while core earnings (before property-related fair value adjustments and exceptional items) grew 2% to $118m. F&N took a $2.6m charge for the lower fair value of investment properties as well as a $7.6m exceptional gain (eg settlement fee, negative goodwill, etc). For the nine months, revenue was flattish (+1%) while core earnings fell 10% to $276m. No dividend was declared in 3Q following an interim dividend cut to $0.03/sh.

Group topline growth was driven mainly by progressive recognition of fully sold property projects in Singapore - One Jervois, One St Michael, Clementi Woods, St Thomas, Soleil@Sinaran, Martin Place Residences and Waterfront Waves – and Songjiang Four Seasons in China. However, it appears that earnings quality was not high. Although property development revenue jumped 44% YoY, PBIT grew only 6%.

In contrast, the F&B businesses performed strongly with both topline and margin improvement. Segment revenue grew 3% YoY but PBIT jumped 27% to account for 42% of group profits, as margin improved 2.5%-points. Soft drink sales grew 15% followed by breweries at 4%. While dairy sales fell 4% (due mainly to lower exports), it chalked up the best margin improvement overall on lower input and packaging costs.

While F&N is almost out of landbank, recent sales success should help it tide over the next 12 months. Moving forward, it will need to start landbanking in Singapore soon. On the F&B side, the extension of the bottling agreement with Coke will gain F&N extra time to build up its own branded soft drinks volume. The removal of geographical and category selling restrictions could be exciting in the long term but F&N does not have the home ground advantage in other SEA countries and Coke will also be able to compete with F&N.

At the current share price, F&N is trading close to our RNAV of $4.17 (previously $4.14). We have raised our forecasts to account for the bottling agreement extension as well as higher F&B margins but impact on RNAV is minimal. We reckon the stock has priced in recent positive developments and maintain our Hold call.

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Fraser & Neave - FCOT overhang resolved

With a bit of luck and sacrifice, the sky is finally clearing up for F&N. It has been able to move most of its unsold property inventory in Singapore but only after lowering prices and margins. FCOT has resolved its funding needs without diluting unitholders but it did require a sacrifice by F&N. Finally, F&N has bought more time to build its own-brand F&B business after wrangling a time extension from Coke.

F&N has moved 88% of its projects under development in Singapore, following a resurgence in the primary market. F&N has about 1,000 units left in its landbank and it is likely to start buying land soon, given its policy of keeping 2,000 units in stock for redevelopment. Balance sheet headroom should come from renewed cashflow momentum, while the FCOT recapitalisation has removed the overhang.

FCOT has also proposed a plan to resolve its funding needs without immediately and substantially diluting unitholders but it did require a sacrifice by F&N via the injection of Alexandra Technopark into FCOT at a yield-accretive price and the guarantee of a rental income stream for 5 years in order for FCOT to obtain banking facilities.

Finally, F&N has bought more time to strengthen its own-brand F&B business after Coke agreed to delay the termination of mutual bottling arrangements by 20 months from Jan 2010 to Sep 2011. While the removal of geographic and category restrictions could be exciting, &N does not have the home ground advantage in other SEA markets, and Coke will also be able to compete with F&N.

At the current share price, F&N is trading close to our RNAV of $4.14, which has been raised from $3.78 following the recent improvement in local property sales and our assumption of lower construction costs going forward, which will boost property development surplus. We reckon the stock has already priced in recent positive developments and maintain our HOLD call.

Management expects the successful launch of projects in Singapore to enhance the - Steady amid property downturn

Management expects the successful launch of projects in Singapore to enhance the group’s cashflow and strengthen its balance sheet position. F&N said it will look to expand its F&B activities organically, while evaluating M&A opportunities.

Management explained that the rights issue and the Alexandra Technopark transaction were meant to improve FCOT’s balance sheet to help secure refinancing of its debt. F&N said there is no need to raise capital at the holding company, given strong cashflow and available funding to meet its FCOT rights entitlement.

The priority in the F&B segment is to look at ways to capture new opportunities following the cessation of the bottling arrangement with Coca-Cola. F&N believes it can enhance its brand presence in Singapore and at the same time grow its 100 plus isotonic drink regionally. Elsewhere, there is scope to grow its dairy business organically, while APB continues to invest in new markets in Asia.

The group appears to have done well, with strong responses to its property projects, including Caspian, St Martin’s Place, 8@Woodleigh and Waterfront Waves. In Australia and China, the group is selectively launching projects and has shelved projects in the UK.

F&N - A Respite

F&N and Coco Cola have jointly agreed to extend their business relationships till Sept 30 th 2011, reaffirming our earlier concern that breaking up is a lose-lose situation, especially for F&N, as it would mean F&N having to build its own bottling plants and distribution facilities for the small Singapore and Brunei markets. (F&N Bhd can take care of the Malaysian market with its existing facilities.)

Although the problem has merely been deferred, there is nothing to say the new arrangement cannot further be extended come Sept 30th 2011.

The current bottling arrangements in Malaysia, Singapore and Brunei were to have expired on Jan 26th 2010, news of which had negatively affected the stock, and basis for our BUY recommendation then. After a strong recovery, which saw F&N share price cross $4, we believe it would have factored in the good response to its residential projects (8 @ Woodleigh and Woodsville 28, which were sold out in recent 2 weeks.)

We would therefore downgrade the stock to Take Profit.

F & N: Hitting a sweet spot

Hitting a sweet spot. Recent launches by the Group have met with overwhelming response in terms of units sold and ASPs. The latest being 8@Woodleigh, which sold c. 90% of the units over its soft launch last weekend at ASPs of S$770psf, 10% above our expectations. Higher-end projects such as Martin Place Residences also met with keen response, at ASPs of S$1,450-$1,700psf, higher than the S$1,250psf we had anticipated. Recent positive property sentiment in China could also bode well for the Group's developments there.

Acquiring land soon? Currently, the Group has an existing landbank of about 930 attributable units in Singapore - relatively low, in our view. We believe it will be looking to acquire land, particularly from URA's Reserve List GLS. This could be a catalyst for the counter, if it materializes, as it (i) signals a positive on-the-ground view of the property market; and (ii) prompt an upward revision on RNAVs.

Upgrade RNAV and recommendation, Buy. We raised our SOTP RNAV by 13% to $5.15 as we (i) revised up our ASPs for its development property launches to current clearing levels and transacted volumes; and (ii) factored in higher market values for its listed entities. We narrowed our discount to 10% (from 20% previously) premising on (i) our house view that the worst is over; (ii) a better than expected clearing levels for property; (iii) potential for land acquisition signaling on-the-ground view that the market outlook is brighter. Upgrade to Buy, TP: S$4.52.

Fraser and Neave - Property remains a key drag

F&B CEO Mr Koh is looking to grow the group’s F&B business organically. The focus will be on developing the soft drinks franchise in Malaysia and Singapore following the cessation of the Coke bottling franchise agreement. Otherwise the group’s brewery business is progressing steadily but with investments in newer markets such as India providing some drag. Longer term, the F&B and property divisions could be de-merged in bid to unlock value. Meanwhile the sale of its printing operations has been put on hold due to poor valuations.


The group has shelved projects in the UK and Australia until markets there stabilise. China is progressing while Singapore is seeing a revival in sales especially in the low-end of the market. Earnings from property, however, will decline with slower sales achieved, although there has been a recent pick-up in volume.


The restructuring of the investment in FCOT is progressing, which could involve the injection of F&N’s commercial properties into FCOT. Although the group has a gearing level of 0.6x, management has reiterated that cashflows remain strong and there is no need for a cash call.


We are update our NAV for F&N with mid-cycle discounts but also mark-to-market the value of its listed companies. The shares are trading at a 36% premium to our updated price target of S$2.67 (from S$2.55). REDUCE rating maintained.

Fraser & Neave Ltd - F&B resilient in recessionary environment

F&N's 2Q09 core net profit of S$99m was in line with expectations, forming 29% of consensus and our expectations. Positives were: 1) resilient F&B sales and margins; 2) improvements in property sales volume in China and Australia; and 3) positive rental reversions from a low base. This was offset by lower property presales in Singapore and disappointing P&P print volume. After Coke's withdrawal, management wants to launch new F&B products under the F&N brand name. Over 70% of the group's S$1.5bn maturing debt in FY09 has been refinanced and a rights issue is not on the agenda, says management. We roll over our RNAV estimate to end-CY10 to capture CY10 rental assumptions. We raise our FY09-11 core EPS estimates by 2-8% on higher rents and property development sales. Our target price, still pegged at a 20% discount to RNAV, rises from S$2.57 to S$2.98. With little upside potential, maintain Neutral.

F&N: 2Q hit by charges; No rights issue

2Q09 below on charges. 2Q09 net profit slipped 25% to $153m. The below expectation results was due to: (i) an allowance of $20m for foreseeable losses in overseas property development projects; and (ii) $11.7m impairment charge from its Printing and Publishing (P&P) division. Excluding these items, PBIT would have been within expectations.

70% ST debt covered; no plans for rights issue. Of the $2.1bn that is due within the year from Sep 08, 70% has been repaid/refinanced. The remaining 30% would be refinanced/repaid as and when they fall due. The Group has no plans for a rights issue, unless there was a substantial M&A deal.

Hold, TP raised to $3.44. We trimmed our FY09F earnings by 12.5%, taking into account the allowance for foreseeable losses for its overseas development properties and other one-offs. Our revenue forecast stays intact. Our TP is raised to $3.44. We narrowed our RNAV discount to 20%, from 30% previously, in line with our house view that the worst is over and a recovery in 2H. However, this counter has surged by 28% in the past week, catching up with the market rally. In view of the limited upside to our TP, we maintain our Hold recommendation

F&N - Dividends cut amidst group / FCOT refinancing needs

1H09 profit before one-time items was $158m (-17% yoy) or 49% of our full year forecast. Reported net profit fell 25% to $153m, pulled down by a $31m provision for future losses on development properties and a $16.8m provision for the lower fair value of investment properties (mainly UK hospitality assets) while share of associates fell into the red after absorbing its share of losses in FCOT, which was hit by a hefty negative revaluation of $144m caused by properties in Singapore, Japan and Australia. The fall of the NZ$ and Rupiah also took away $8.8m.

F&B accounted for 54% of group profits, up from 40% a year ago, led by a strong profit rebound in Dairy (+40% yoy) and decent performance by Soft Drinks (+8%) and Beer (+9%). The festive season boosted Soft Drinks volume, while Dairy (PBIT +125% yoy in 2Q) in particular saw profits boosted by lower raw material costs. Beer profits would have grown by 16% yoy if not for forex and gestation losses. However, property profits fell 34% yoy to 46% of group profits as several Singapore projects (Raintree, Azure, One Leicester and Infiniti) were completed while $31m in foreseeable losses on overseas projects was provided for.

Interim dividend was cut from 5 cents (36% payout) to 3 cents (26% payout) as F&N opted to conserve capital as it still needs to refinance some $600m in borrowings. While management ruled out a rights issue of its own, it may still need to support FCOT’s rights issue, which we reckon is more likely to happen than not. As at Mar 2009, FCOT had short term debt of $619m due in July and F&N owns 22% of FCOT.

With Coke out of the picture next year, F&N will be able to add new product categories and expand beyond Singapore and Indonesia. Growth prospects post-Coke could be exciting but in our view, will take some time to fully emerge.

We maintain a Hold call on F&N while price target has been raised to $3.50 based on 15x P/E. Our RNAV is $3.79 and includes a 30% discount). Dividend yield is also not exciting at just 2.4%.

Fraser & Neave - F&N remains a highly bankable company

Earnings reductions. We have lowered our FY09-11 core EPS estimates by 2-10% to account for lower F&B earnings from: 1) the withdrawal of Coke; 2) a deferment of overseas property sales in Australia, China and the UK; and 3) lower selling price estimates for its Singapore property inventory.

Lowering RNAV to S$3.21 from S$3.80 We lower our end-FY09 RNAV from S$3.80 to S$3.21 on lower selling prices for its entire property portfolio and the further underperformances of its stakes in listed associates and subsidiaries. APB has underperformed the market in the recent stock-market rally. We estimate that current valuations imply 10-15x FY09 earnings. While we do not have an official view on the stock, we continue to like its business model and ability to generate good cash flowsduring good times and bad. As such, we refrain from marked-to-market valuation for this stock and apply a higher valuation (implying 20x forward earnings) in our sum-ofthe- parts valuation for F&N.

Upgrade to Neutral from Underperform. We also lower our valuation discount gap for F&N from 30% to 20%. We came away from the Hong Kong road show slightly more positive as issues such as a potential rights issue and life after Coke in the F&B segment had been verbally addressed. We believe a higher discount gap at this point may be too negative. However, a 20% discount to RNAV is applied to reflect a potential deterioration of its balance sheet and its holding company structure. While we like the prospects of its F&B segment, significant accretion to RNAV may only come in the longer term, in our opinion. In its property segment, a re-rating of themass market will likely be the key driver for the group this year. A less-nimble balance sheet could pose some obstacles for F&N to increase its prospective NAV when prices start to bottom out.

Following all our adjustments, our target price has been lowered from S$2.66 to S$2.57. The FSSTI has done very well in recent weeks, up by around 25% to 1,820 points since the beginning of March vs. our house target of 1,800. At our target price, the stock is not an Underperform relative to the benchmark index. Upgrade to Neutral from Underperform.

F&N Malaysia to lose Coke franchise next year

Coca Cola has decided to let its bottling and distribution agreements with F&N Berhad, F&N’s 57.9% subsidiary, expire in Jan 2010. This will hit its results negatively as Coke accounted for 12% of F&NB’s FY08 revenue and an estimated 17% of operating profit. Our analyst for F&NB in Malaysia estimates a 10% reduction in FY10 earnings and 15% in FY11.

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.