F&N- sailing thru rough waters!

Results Update

Since my last update in May 2011, F&N had gone through a tough time. The latest quarterly results is a continuation of the difficult period. Its net profit dropped by 37% q-o-q or 61% y-o-y to RM42 million while turnover was lower by 25% q-o-q or 28% y-o-y to RM743 million. The lower profit was attributed to the loss of the Coca-Cola franchise & losses in Thailand due to the flood.


Table: F&N's last 8 quarterly results



Chart 1: F&N's last 21 quarterly results

Prospects Going Forward

The impact of the loss of the Coca-Cola franchise had been factored into F&N's financial performance a few quarters ago. The unexpected events were the flood in Thailand (for QE31/12/2011) and, provision for under-payment of royalty for a dairy product of RM11 million (QE30/9/2011). I believe these surprises are one-off events, which are not likely to recur.

Going forward, the Olympic 2012 in London will be a positive event which would boost the sale of soft drink. As such, I expect F&N's top-line & bottom-line to stabilize for the next two quarters & stage a rebound in QE30/9/2012.

Valuation

F&N (closed at RM17.30 last Friday) is now trading at a PE of 19.5 times (based on last 4 quarterly EPS of 88.54 sen). At this PE multiple & given the mildly negative outlook for next two quarters, I believe F&N may trade lower to a PE of 17-18 times (to RM15-16 a share).

Technical Outlook

F&N appeared to have make a top near the RM20 mark recently. It is now testing the 20-month SMA line at RM16.60. If this support cannot hold up the share price, it may test the 30-month SMA line at RM14.70. Over the past 10 years, F&N had tested the 30-month SMA line once and that was in 2009 when Coca-Cola announced that it would not renew the Bottler’s Agreements and the Distributor’s Agreement with F&N upon expiry on 26 January 2010.


Chart 2: F&N's monthly chart as at Feb 2, 2012 (Source: Tradesignum)

Conclusion

Based on the above, I would rate F&N a trading SELL. This means that you may sell the stock now and buyback when the share price had traded lower at about RM15.00.