How much will this termination impact F&N? According to the Bursa announcement:
Soft Drinks division is the single largest profit contributor to the F&NHB Group accounting for 48% of the Group’s operating profits. Sales revenue of TCCC products, mainly Coca-Cola and Sprite, amounted to RM 421 million or 35% of the division’s revenue in FY 2007/2008. The remaining RM 765 million or 65% of the division’s revenue were contributed by F&N Group products which included 100Plus, F&N carbonated soft drinks, Seasons and Fruit Tree. Both TCCC range of products and F&N range of products share common bottling operations, distribution channel and logistics supports. The average gross profit margin of the soft drink business is 35%.
In addition, I have extracted the Soft Drinks division's share of F&N's overall turnover & operating profit for FY2008, FY2007 & FY2006 (see below).
Table 1: F&N's Soft Drinks divisional performance
From the above, we know the following:
1) Soft Drinks division accounted for 48% of F&N's overall operating profit, but only 33% of F&N's overall turnover in FY2008;
2) TCCC products amounted to RM421 million or 35% of the Soft Drinks division’s revenue in FY2008: and
3) The average gross profit margin of the Soft Drinks business is 35% (which may not apply to TCCC products).
Assuming that TCCC products carry an operating profit margin of 15% and their sale amount remained at about RM420 million, then F&N would miss out on an operating profit of RM63 million from this termination. This amount could be higher if the available resources presently allocated to produce TCCC products are not fully redeploy for other purposes; thus resulting in under-recovery of some fixed overhead costs. The later is assumed to be negligible, i.e. I assume F&N managed to redeploy all the resources presently allocated to produce TCCC products.
From Table 2 below, we can see that F&N's net profit for the last 4 quarters amounted to RM167 million. So a drop in operating profit (or, pre-tax profit of RM63 million or net profit after tax of RM47 million) will result in a lower in full-year net profit of RM120 million. This means a lower EPS of about 34 sen (as compared to last 4 quarters' EPS totaling 47 sen). Based on its closing price of RM7.70 at the end of the morning session today, F&N is now trading at a prospective PE of 22 times. Before this problem, F&N share was trading at RM9.00 as investors were prepared to accept a PE multiple of 19 times for this steady consumer stock. If investors insist on a PE multiple of 19 times again, then F&N share price may trade to about RM6.45 based on my above calculation of the new earning for F&N.
Table 2: F&N's 8Qs result
From the two charts below, we can see that F&N has just broken below its immediate uptrend line support of RM8.00 as well as the horizontal support of RM7.85. More horizontal support can be seen at RM7.50 & RM7.00.
Chart 1: F&N's weekly chart as at Feb 19, 2009 [10.45 am] (source: Quickcharts)
Chart 2: F&N's monthly chart as at Feb 19, 2009 [10.45 am] (source: Quickcharts)
Based on the possible bearish technical outlook (resulting from the breakdown of the uptrend line at RM8.00) & possible downgrading of F&N's earning for FY2010, we should avoid F&N for now.
PS. The computation of the financial impact arising from the loss of the distribution of the TCCC products is a rough guide only.
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