Fraser and Neave

[winston]

From Kim Eng:-

Fraser & Neave 1HFY2008 results (Gregory YAP, DID: 64321450)
Previous Day Closing price: $4.92
Recommendation: Buy (maintained)
Target price: $6.00 (maintained)

Keeping within the band

F&N reported 1H08 net profit rose 11% YoY to $201m, up from $181.5m a year ago (against our full year PAT forecast of $422m). Similarly, PBIT rose 10% to $406m (full year forecast: $857m).

Organically however, PAT and PBIT soared 25% and 23% respectively as 1H07 results included several non-recurring items (see table).

Growth was driven by recognition of Singapore residental projects, the acquired Nestle business, stronger soft drinks sales and better commercial property contributions.

The Star Performers

Dairies (PBIT +99%; 4% of total PBIT) did the best, with growth mainly from the acquisition of Nestle’s tinned milk business in Feb 2007. Despite rising raw material costs, margin improved YoY to 2.9%.

Investment property and REIT (PBIT +45%; 24% of PBIT)) continued to benefit from high occupancies and positive rental reversion. Adjusted for a one-off $16m revaluation surplus from Malaysian and UK associates in 1H08 and $4.5m in one-off gains in 1H07, PBIT climbed 30%.

Soft drinks (PBIT +21%; 8% of PBIT) benefited from stronger seasonal sales, higher ASP and effective brand building.

Printing & Publishing + Glass Containers (PBIT +15%, 7% of PBIT). P&P margin improved despite lower sales due to selective price increases and supply chain initiatives, while glass containers benefited from higher volume with a new glass plant in Thailand.

Breweries (PBIT +11%, 26% of PBIT) achieved volume and profit growth in almost all markets except China, Mongolia, India & Sri Lanka (mainly gestation losses). Excluding gestation losses and forex differences, organic earnings was a bubbly 20% higher.

Development property (31% of PBIT) registered an 11% fall in PBIT mainly because of the 1H07 one-off gains mentioned above. Following adjustments, PBIT rose 12%. Development profit for FY08 is secured due to past fully-sold projects but F&N cautioned that future sales volume will fall (0nly 256 units were sold in Singapore in 1H08 vs 900 in 1H07) and new launch margins will normalise at 15-20% (vs >30% for projects launched in 2006-07) due to higher construction costs.

Maintain BUY
F&N’s growth engines are still turning over smoothly on the present business mix.

But the search for a CEO continues and F&N must appoint one by year-end, else investors will begin to question its future direction, especially if the main profit generator, Singapore development property, starts to falter badly.

[iam802]

just to add on to this post, F&N has registered an Australian property subsidiary recently.

[LenaHuat]

Investment Property and Development Property now constitute 55% of PBIT.
The balance like breweries, dairies, softdrinks are almost running on auto-pilot.
The publishing biz is an odd fit.....a heritage.

I'm keeping a close watch on the CEO-appointee. If it's a guy from the property circle, I think I will cut my exposure.

[winston]

I'm keeping a close watch on the CEO-appointee. If it's a guy from the property circle, I think I will cut my exposure.

Hi L, Why cut if property guy ? Take care, Winston

[LenaHuat]

Hi Winston

If so, then F&N could be juz another property play. In which case, I think I have too many property counters in my portfolio oredi. (Sidenote : your call on Stamford Land is smashing).

[mojo_]

Don't follow this counter closely but wonder the implications of it adopting an asset lite strategy for it's properties (like Capitaland has done). It already has a shopping mall reit (FCT) for spinning off it's malls. I recall last year there was some speculation that it could spawn other reits for it's serviced residences and industrial properties. Just thinking out loud...

[LenaHuat]

Hi mojo - Glad that U've turned your head in this direction. Welcome!

According to the DBSVickers 2008 US roadshow slides posted in the F&N website, they are gunning for a commercial REIT in 2008. It will comprise of 1.4m sqf of office towers and high-tech biz park with a book value of $710m as at the end of Sep 2007. This is not really sizeable. Moreover, market conditions are not fav for floating a REIT now.

The other possb (not mentioned in the slides but previously speculated) are :- a serviced aprt REIT and a retail REIT (Anchorpt, Causeway Pt and Northpt). Again conditions aren't in their fav.

What lacks clarity is Temasek's plan for F&N........I've yet to see LHY show his hand.

[helios]

e retail concept (L1) to do full-glass panel for anchorpoint, is not convincing enough. i think e proposal is to max. their basement marketplace to do open-shop concept (like those u see in cityhall shopping mall jasonmarket), local style, don't seem appealing. if not wrong, e price is ard ~$7-10psf.

i met them b4 last year, dropped e evaluation coz BB in orchard road r spawning out newer membraned & duplex malls and we gonna to have 3 lifestyle malls in orchard upcoming...

[mojo_]

Actually the shopping mall reit (FCT) has already been listed since about mid 06 (took some positions very recently, that's why head turned this way ). Capitaland has been very innovative in unlocking a lot of shareholder value and I was wondering if F&N can do the same for it's sprawling empire and reitization is probably an avenue, tho' agree timing now is not ideal. LHY joining as chairman should bode well for the counter, I think.

Anchorpoint (which is part of FCT) upgrade was completed end of 07. Rentals went up by a whopping ~40+%! So they must have done something right? It's a suburban focus so the target market is very different to that of Orchard Rd... more non-discretionary stuff which is more recession-resistant...

[helios]

typical sub-urban mall (that caters to e locals), i wld feel towards AsiaMall ...