Fraser & Neave Holdings Bhd (F&N)

Recognize the above logo? I believe many of you do know the F&N brand. If you are unaware of this, it is a public listed company on Bursa Malaysia and it has been with us for more than 130 years! For a brand to exist for such a long period, there must be some reasons behind it. Fraser & Neave Holdings Bhd is principally engaged in 3 business segments: soft drinks, dairy products and property (minor).

F&N has a wide range of soft drink products. I have been drinking many of them ever since I was born. After a badminton session, you ought to see many people holding a can of 100Plus. During the yearly Chinese New Year, most people serve their visitors with Seasons drinks. Some Chinese even use F&N drinks for prayer purposes! Below are some of its dairy products.

F&N is the market leader in the sweetened condensed milk and evaporated milk market. Millions of Malaysians drink teh tarik, coffee and cakes or confectionery etc. made from F&N’s broad range of dairy products. In fact, according to the management of F&N, they command for more than 60 per cent market share in this field!

Similar to Nestlé (M) Bhd, F&N's products have been relatively unchanged over a long time. With a track record of sustainable demands for its unchanged products, we can expect F&N to deliver a stable performance in the years ahead. So let's see how F&N performed financially in the past 5 years.

Revenues stayed relatively flat but net profits faced downward pressures for the past 5 years, leading to lower net profit margins. Ignoring the outlier in 2012, operating cash flows were positive and stable. However, return on equity and return on capital employed faced strong headwinds, implying the management's lower efficiency in deploying the company's capital. If that's the case, the management should further increase its dividend payout and/or executive share repurchase programs to distribute cash back to its shareholders. F&N has been maintaining its high dividend payout ratios. Also, it has kept its debt levels at manageable levels in the past 5 years.

Overall, I think F&N's financial performances were fair. However, there are a few potential risks an investor needs to bear in his/her mind. In the latest FY2014, 40% of the company's revenues were derived from its soft drink segment. This business is extremely competitive as there are many good brands out there such as Nestlé, Pepsi, Yeo's etc. Customers have extremely low switching cost as there are many substitutes to choose from in the marketplace. As such, F&N has a cut-throat profit margins.

In regards to its dairy business, I feel safer due to its market leading position and strong brand portfolio. Unlike soft drinks, sweetened condensed milk and evaporated milk are more sustainable and predictable as they are one of the ingredients of many end products. You may take a look at the shelves of some hypermarkets like Aeon and Tesco, you would be surprised to see F&N manufactures most of the sweetened condensed and evaporated milk brands!

A low profit margin business doesn't mean that the business is bad. It can still thrive with high sales volume. One example is Walmart in the United States, a Warren Buffett heavily-invested company. It is mainly engaged in the operations of discount department stores and warehouse stores. Due to its extremely huge distribution networks in the US, it is capable of achieving superbly high sales volume, thereby generating huge profits.

There is another risk which I am particularly concerned of, the CEO's ownership in the company. Mr. Lim Yew Hoe, CEO of the company, doesn't have a substantial stake in F&N. I would prefer my investments to be managed by CEOs / Managing Directors who share the same interests and visions as me. By owning a large interests in a company, the CEO would be well-encouraged to maximize shareholders' value as well as his interests at the same time. Personally, I think F&N lacks of this criterion, which could be the main factor for having flat sales in the past 5 years.

Let me summarize this article. F&N has strong and unchanged products which deem to be stable and predictable. Its diaries are necessities for many of us. Historical financial performance was fair. Also, it has low margins and therefore its business must be sustained by high sales volume. Finally, its customers have low switching costs and they have many other options to choose from (soft drinks).

Also, it is noteworthy that F&N has lost two major business lines in the past - Coca-Cola franchise (2011) and Red Bull dealerships (2015).

Source: Bloomberg

Note: This value pyramid only shows what I think about a company’s valuation as at the time of writing this particular article. Do bear in mind that when a stock is undervalued, it doesn’t mean it can’t go any lower and vice versa. Please exercise your own judgment and do not treat this as a recommendation to buy or sell.

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#FN #FraserNeave #seasons #100Plus