F&N may have seen its toughest quarter

 Results Update

For QE31/3/2012, F&N's pre-tax profit declined by 64% y-o-y but increased by 8% q-o-q to RM57.7 million while turnover  was down 28% y-o-y or 2% q-o-q to RM730 million. The decline in turnover on a y-o-y basis was attributable to the cessation of the Coca-Cola distribution business, the lower sales from the Thailand dairies division (due to the flood) and the drying-up of sales from the property division. This had caused the operating profit of the Soft drink division (where Coca-Cola business was parked) to dropped from RM69 million to RM26 million and the Thailand dairies division to report a loss of RM18 million as compared to RM19 million previously. Meanwhile, the Malaysia dairies division was impacted by higher raw material cost which saw its operating profit dropping by 53% y-o-y to RM7 million.

F&N was able to report a respectable pre-tax profit due to the capital gain from the divestment of a 50%-interest in a development land in Section 13, Petaling Jaya. F&N's net profit jumped 156% q-o-q but still dropped by 19% y-o-y to RM107 million due to the recognition of a deferred tax asset of RM55  million in relation to the halal hub tax incentive.


Table: F&N's last 8 quarterly results


Chart 1: F&N's last 24 quarterly results


Prospects Going Forward

For the 2nd half of the financial year, F&N's financial performance is expected to improve only marginally. Its Thailand dairies division is expected to be back in production but the Malaysia dairies division is expected to suffer hiccups as the production will be moved to the newly-completed plant in Palau Indah.


Valuation

Based on the following assumptions:
1. The Malaysia & Thailand dairies division can swing back to the level of operating profit last saw in QE31/3/2011 (of RM15 million & RM19 million, respectively),
2. The Soft drink division merely maintained its current level of profit as recorded in QE31/3/2012 (of RM26 million),
3. The pre-tax profit is about the same as its operating profit (as per past results), and
4. The tax rate is at 25% while the Property division remained non-contributory.

We can arrive at a quarterly net profit of RM60 million for F&N. Dividing that by 361 million outstanding share, we would arrive at a quarterly EPS of 12.5 sen (or a full-year EPS of 50 sen).

As such, F&N (closed at RM19.00 yesterday) is now trading at a current PE of 38 times. At this PE, F&N is deemed overvalued.

Technical Outlook

F&N is looking rather toppish now. Its MACD indicator has already crossed down, which is a bearish signal. F&N has good support from the 15-month EMA line & the 20-month SMA line at around RM17.50. The last time, it broke below these two lines was in early 2009, when the stock dropped to the 40-month SMA line.


Chart 2: F&N's monthly chart as at May 7, 2012 (Source: Tradesignum)

Conclusion

Based on the above, the previous rating for F&N of a trading SELL is maintained. The stock is overvalued & the technical signals is mildly bearish.