F&N: Earnings improved despite lower revenue

Result Update

For QE31/3/2015, F&N's net profit rose marginally by 1% q-o-q or 4% y-o-y to RM70 million while revenue was mixed- down 9% q-o-q but rose less than 1% y-o-y to RM940 million.

Revenue was lower q-o-q due to the pre-GST de-stocking by its distributors and retailers, which impacted both Soft Drinks and Dairies Malaysia. Its profit before tax however, increased by 6.5% to RM86.6 million, with Dairies Thailand recording a significant improvement in operating profit mainly due to lower trade discounting and  improved  milk-based  commodity  cost. Soft Drinks’s  operating  margin  improved by 2.0% mainly due to the reversal of provision of impairment of property, plant and equipment associated with the floods in the East Coast States on near finalisation of repairs of  affected assets and the absence of impairment of  receivables. Excluding the effects of certain one-off  income in the current quarter, Dairies Malaysia’s operating profit was in line with the lower revenue.


Table: F&N's last 8 quarterly results


Chart 1: F&N's last 34 quarterly results

Recent Business Development

In March, F&N announced that it has lost the distributorship for Red Bull energy drinks in Malaysia. This distributorship - expired at end March - will continue during the transition period up to end September 1995.

According to a recent CIMB's report, Red Bull accounts for 5% of F&N's revenue (or RM200 million) and 5% of F&N's net profit. Although the loss of the contract would hit F&N's bottom-line temporarily, CIMB expects F&N to recover quickly based on its experience after the termination of the Coca-Cola contract in 2011. 

Valuation

F&N (closed at RM18.54 yesterday) is now trading at a PE of 26 times (based on last 4 quarters' EPS of 72 sen). At this PE multiple, F&N is deemed fully valued.

Technical Outlook

F&N has been range-bound for the past 4 years between RM15.50 and RM19.00.A breakout of this trading range would determine the direction of the price movement going forward.


Chart 2: F&N's daily chart as at May 5, 2015 (Source: ShareInvestor.com)

Conclusion

Based on satisfactory financial performance and strong management, F&N remained a good stock for long-term investment. However, F&N's demanding valuation and neutral technical outlook would argue against a BUY at current level. It deserves at best a HOLD rating.

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, F&N.