Business

Saturday November 21, 2009

F&N prepared for life without Coca-Cola

By YVONNE TAN


HAVE a Coke and a smile – that was one of the most memorable taglines for Coca-Cola.

Although Fraser & Neave Holdings Bhd (F&N) has lost the rights to sell Coca-Cola drinks locally, the company has every reason to remain optimistic.

F&N CEO Tan Ang Meng

“We have been preparing for life post-Coca-Cola and we are pretty optimistic,” chief executive officer Tan Ang Meng tells StarBizWeek.

F&N caused some panic among investors in February when it announced the loss of the lucrative bottling agreement with The Coca-Cola Co which contributed more than 35% in sales in the year ended Sept 30, 2008 (FY08) and 32.5% in FY09.

Investors wasted no time selling the stock, pushing it down about 10% to the year’s low of RM7.55.

To recap, on Feb 19, F&N said Coca-Cola Co decided not to renew the bottling agreement with the company when it expires in January 2010. It did not provide a reason for the decision.

The agreement, however, was subsequently extended to September 2011, Tan said, effectively giving a 20-month “transition period” for F&N.

“Twenty months is a short timeframe for developing new products, building market share, expanding into new markets and widening distribution channels but we are intensifying efforts,” Tan says.

He expects consumption trends to increase in line with economic recoveries and says that F&N will “progressively launch” new products like tea and juices – the first of 50 products it targets to launch within the next two years. “That is going on nicely,” he says.

Group income is currently derived from four segments – soft drinks, dairy products, property and glass containers.

“Soft drinks used to be the biggest contributor to sales, with more than 50% contribution.

“However, since we acquired Nestle’s canned milk business in Malaysia and Thailand back in 2007, the dairy products division has become the largest contributor to group revenue at 51%,” Tan says.

“In Thailand (where it also has presence), we will continue to develop the F&N brand family equity through our F&N Bird’s Nest and milk beverage, F&N Creations 3-in-1 coffee mix, Magnolia sterilised fresh milk, Magnolia Choc Malt and Tea Pot Extra Evaporated Milk range,” he adds.

Thailand, he says, will be the company’s launch pad into Vietnam and it also intends to expand its canned milk operations in Cambodia, Laos and Myanmar.

Although F&N is expecting growth to come mainly from its core food and beverage business, it has also been busy in the property segment.

Tan says the property venture was spurred by the prospects of unlocking the values of former factory land belonging to the group in various parts of the country.

He cites Fraser Business Park, which is F&N’s maiden foray into property development, as an example.

The development sits on the company’s old soft-drinks factory site off Jalan Yew, Kuala Lumpur, after its soft-drinks operations outgrew its original site and had to be relocated to a bigger plot in Shah Alam.

The project comprises three phases – the RM181mil Phase 1 consisting of 80 shop offices were completed in 2006 while Phase 2, a RM350mil integrated commercial and residential development, is targetted for completion by January 2010.

The value of the properties in Fraser Business Park Phase 1 has been reported to have appreciated more than 150% in certain transactions.

“For FY09, the property division contributed about 2% of group revenue – reflecting the group’s direction for the property business, going forward,” Tan says.

F&N still has land in Petaling Jaya, Ampang, Kajang, Johor Baru and Kota Kinabalu for “eventual realisation”, he says. Its F&N Petaling Jaya site of 13-14 acres, for example, has an estimated gross development value of RM1bil.

On expansion, Tan says that every year, the company sets aside funds to renew equipment and facilities to support its growing business. Noteworthy for FY10 will be the construction of a dairy plant on Pulau Indah. This is to replace its ageing dairy plant in Petaling Jaya.

The RM350mil state-of-the-art factory will be completed by 2012, upon which it will be the largest canned milk plant in South-East Asia, Tan says.

In FY09, F&N made a net profit of RM224.4mil or 63 sen per share against a net profit of RM166.8mil or 46.8 sen per share a year earlier, exceeding market expectations by 7%. Revenue stood at RM3.73bil against RM3.67bil earlier.

The higher income was largely attributed to bigger earnings from its dairy division, backed by a continued increase in margin due to cheaper raw material imports, higher sales volume of soft drinks during the fourth quarter due to festivals, and a significantly lower effective tax rate of 2% due to recognition of deferred taxation amounting to RM12mil.

AmResearch has upgraded the stock to a “buy” from a “hold” and said that growth should come largely from anticipated higher sales from additional production capacity.

“Looking ahead, while we acknowledge that post-FY11 forecast poses some execution risks, we reckon any earnings disruption during this transitional phase would be minimal, given F&N’s solid game plan for new product launches – as it rides on its strong brand equity and distribution network,” it said in a note to clients.

“Over the past 10 years, the group has rewarded shareholders with increased dividends year-after-year in line with improved financial performance,” Tan says.

Shareholders who had invested RM3.20 per share on Sept 30, 2000 would have received cash dividends amounting to RM2.53 per share over the past decade. Based on the closing price of RM10.23 as at Sept 30, this translates into 17% compounded annual return on the initial investment.

“We will endeavour to maintain or increase dividend payout in years ahead depending on group performance,” Tan says.

AmResearch reckons that F&N would implement a conservative dividend policy, going forward, as compared to its higher historical payout of 77%-88% over the past several years.

“However, having said that, we are not discounting the possibility of a dividend surprise alongside strong consumer reception for the group’s new drink products,” it says.

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