Outperforming FBM KLCI Index: What's the Story Behind F&N?

Fraser & Neave Holdings Bhd (F&N) has seen its shares rise by nearly 18% year-to-date, outperforming the KLCI index, with the advantage widening since April. Analysts are also positive on the company's prospects. On the one hand, the upcoming extreme weather is expected to increase beverage consumption, boosting the company's sales; on the other hand, this consumer food and beverage manufacturer will focus on cost optimization and rising sales volumes to expand profits.

F&N is expected to reap significant benefits from the upcoming Southeast Asian heatwave. MIDF Research notes that extreme weather conditions will lead consumers to seek refreshing and convenient options to stay hydrated and cool, thereby boosting demand for ready-to-go (RTG) beverages and out-of-home (OOH) consumption. The El Niño phenomenon is expected to persist until mid-May, before the anticipated La Niña event takes place from June to September 2024. Demand for its products is expected not just from main operating countries like Thailand and Malaysia, but also from exports across Southeast Asia. Therefore, MIDF Research projects a surge in revenue for F&N in the second and third quarters of the fiscal year 2024.

F&N plans to grow its core business revenue by boosting sales volume instead of increasing prices. Its strategies to drive sales volume growth include the following aspects: 1) Expanding the product portfolio, such as introducing gummies with natural fruit juices; 2) Planning collaborative projects, like the "Garfield Movie x Magnolia Campaign"; 3) Selling directly to end-users, for instance, offering Teapot condensed milk to hawkers in Thailand, accompanied by a loyalty program that allows hawkers to collect points and redeem prizes; 4) Special event-driven marketing activities, such as the Mother's Day campaign for Nestle's Bear Brand sterilized milk products (F&N manufactures and distributes Bear Brand products in Thailand and Laos under a licensing agreement with Nestle); 5) Strengthening customer engagement, for example through interactive advertising in the Gempak 2.0 and Beli & Menang campaigns; 6) Boosting exports, where income settled in hard currencies can naturally hedge against foreign exchange fluctuations.

"This will be continuation from the first half ended of financial year ending Sept 30, 2024 (FY24), during which its top line grew 11% year-on-year driven mainly by sales volume (as it did not raise prices) on the back of effective marketing strategy during the festive periods," Kenanga said.

The company believes cost management can offset the profitability challenges brought about by the rise in raw material costs. TA Research suggests F&N will keep prices stable in H2 FY24, relying on cost management to handle price pressures and projecting to sustain a gross margin of about 31%.

Chief Financial Officer Tiong Yean Yau commented, "We've used bulk commodity hedges to control costs." CEO Lim Yew Hoe added at the F&N mid-year briefing for 2024, "Gelatin's high cost is a major concern. Our extra stock from last year's purchases gives us a temporary cushion, but we'll face more pressure when it's gone next year."

The company's newly established dairy farm also contributes to cost control. F&N has prepared its site for an integrated dairy farm and ordered the first 2,000 cows from the US, with production starting in early 2025. At peak capacity, the farm will host over 20,000 cows and produce 100 million liters of milk yearly for local and global markets.MIDF Research said, "We commend the group's initiative in the integrated dairy farm to improve self-sufficiency (cost savings) and cater to the underserved fresh milk market in Malaysia with affordable pricing."

F&N has also implemented a series of measures to enhance efficiency. Over the past five years, it has invested nearly RM1.5 billion in its Shah Alam factory for an Automated Storage and Retrieval System, a liquid milk plant in Thailand, a drinking water production facility in Kota Kinabalu, and photovoltaic panels at various locations. F&N believes that by improving operational efficiency across its businesses, there is potential to expand profit margins.