Fraser and Neave Holdings Bhd (F&N) reassures investors that the group will distribute a decent dividend of nearly 80 sen for FY2024/2025 (to end Sept 30, 2025) as the milk production normalises following the sourcing of high-yielding milk cattle and the start of corn-feed plantation, according to Kenanga Investment Bank Bhd (Kenanga Research).

F&N is actively sourcing alternative cattle, targeting livestocks with Genomic Total Performance Index (GTPI) exceeding 2,500 (capable of yielding up to 40 litres of milk per day) to ensure optimal productivity and will start corn-feed planting to provide feedstocks to the cattle.

The integrated dairy farm project in Gemas is facing delays in milk production by six or twelve months from the initially scheduled January 2025 due to an import suspension by Malaysia Department of Veterinary Services (DVS) over avian flu concerns, communicated just two days before the scheduled US cattle shipment.

The dairy group hinted that the lower dividend of 63 sen declared in FY2023/241 is attributed to this suspension and reassured that FY2024/25 dividends to return to a decent c.80 sen, aligning with Kenanga Research's forecast of 75 sen.

Analysts continue to favour F&N for its earnings defensiveness given the stable demand for essential food items despite high inflation, its long-term growth prospects driven by its investment in a sizeable dairy farm in Gemas, Negeri Sembilan, as well as the rising popularity of ready-to-drink products where F&N has a strong presence.

Kenanga Research has maintained the OUTPERFORM call for F&N and the target price of RM36.30, after factoring in impact from higher labour costs and sugar tax hike.

As at 3:31pm Nov 7, F&N's stock traded below the RM30.00 threshold at RM29.76, down by 98 sen from its previous settlement of RM30.74.

The dairy farm's total capital expenditure allocation for Phase 1 is RM2 billion, with RM1.85 billion already allocated. Another RM1 billion is planned for Phase 2 to achieve economies of scale, bringing total investment to nearly RM3 billion. With this, the farm ultimately targets producing 200 million litres of fresh milk annually, supported by 20,000 milking cows.

Assuming management is able to get Phase 1 started by FY2025/262, there could be an indicated capacity of 100 million litres. Assuming the lower range of current market price as indicated by management of RM8-15/litre, and annualised 100m litre sales, with an 8% pre-tax margin, analysts believe PATAMI potential could be up to RM49 million a year. This would represent a 7% upside to earnings in FY2025/26, and fair valuation.

For now, analysts have not incorporated this due to execution and timing risk of getting production started. Prior to production, there would mainly be cash outflow risk. Outlays in start-up costs for FY2023/24 amounted to RM17 million.

1. FY2023/24: Financial year ended September 30, 2024 ︎
2. FY2025/26: Financial year to end September 30,2026 ︎