Profit ratio

Analysts see product diversification, F&N expansion as Cocoaland privatizes

KUALA LUMPUR (June 7): Analysts see diversification and product expansion of Fraser & Neave Holdings Bhd (F&N) by privatizing Cocoaland Holdings Bhd.

MIDF Research has raised its target price (TP) for F&N to RM30.91 as the research firm believes privatizing Cocoaland will create value for the company due to product diversification and expansion of its customers for the foreign market.

“We maintain ‘buy’ with a revised TP of RM30.91 (previously RM30.03) as we defer our valuation year to FY23 (the year ending September 30, 2023) based on an unchanged price-earnings ratio of 26 times pegged to earnings per share (EPS) of 118.9 sen. The PER is based on its five-year historical average. The dividend yield is estimated at 2.78%.

“The main downside risks include an unfavorable conversion of the ringgit into Thai baht, a sharper increase in commodity prices and supply chain disruption,” the MIDF said in a note on Tuesday (June 7th).

Last Friday, F&N offered to privatize Cocoaland, its 27.66% shareholder, by buying the remaining shares at RM1.50 each. The remaining 72.34% represents 325.43 million Cocoaland shares which are not held by F&N.

The total consideration for the proposed privatization is approximately RM488.15 million, which will be paid in cash and financed by bank loans.

“Nevertheless, we make no changes to our earnings forecast at this stage. We believe that the proposed privatization will not have a substantial material impact on the group’s debt ratio,” the MIDF said.

Separately, CGS-CIMB Research said the deal came as a surprise as the research firm believes F&N will focus on expanding its product portfolio towards lower-sugar products.

“However, we agree with F&N that this acquisition can bolster its plans to expand its halal packaged food segment (a dedicated growth pillar). We expect strong business synergies as F&N can expand its product portfolio and market Cocoaland products through its wider distribution network.

“Based on our estimates, this acquisition could increase F&N CY23-24’s EPS (calendar years 2023 and 2024) by 0.7% to 2% assuming additional financial costs of RM22 million for CY23-24, Cocoaland CY23/24 net profit of RM34.5 million/RM41.7 million (Bloomberg consensus forecast), and the conclusion of this agreement by 4Q22 (the fourth quarter of 2022),” said CGS-CIMB.

According to CGS-CIMB, it has yet to factor the potential increase in earnings into its estimates pending the completion of the acquisition.

CGS-CIMB, which retains its “extra” call on F&N, lowered its TP to RM25.60 (from RM29.80) as the research house cut its FY22-24 EPS forecast for F&N on costs higher inputs and a 4.3% risk-free rate on rising government bond yields.

“We still like F&N as an indicator of a recovery in hotel, restaurant and cafe (HORECA) sales (around 30% of FY19 sales), which should offset rising input costs. It is also trading at an attractive 17.1x CY23 PER, with a 26.3% discount to its historical five-year average of 23.2x as well as a 54.4% discount to the weighted average CY23 PER 34.7 times from the consumer sector,” he added.

As of this writing on Tuesday, F&N shares were trading down 34 sen or 1.7% at RM19.66, with some 80,400 shares changing hands. This valued the group at RM7.21 billion. Year-to-date, the stock is down 20.4% from RM24.70.

Cocoaland – the fifth best gainer so far in the day – rose 13.28% or 17 sen to RM1.45, giving it a market capitalization of RM663.52 million. The counter has jumped 42.16% since the start of this year.

Read also:
F&N to privatize Cocoaland at RM1.50 per share