UOBKH Research says the dairy segment should provide impetus for growth and possibly a re-rating prospect of the stock.
PETALING JAYA: Fraser & Neave Holdings Bhd
’s (F&N) long-awaited upstream fresh milk business project is slated to see its first milking in early 2025.
According to UOB KayHian Research (UOBKH Research) the dairy segment should provide impetus for growth and possibly a re-rating prospect for the stock.
The group started its upstream dairy farm in Gemas, Negri Sembilan last year.
The 2,726-ha plot of land is expected to eventually house 20,000 milking cows, producing 200 million litres of fresh milk – potentially making it the largest dairy farm in South-East Asia.
Its first phase will initially involve 10,000 milking cows producing 100 million litres of milk.
“The first milking timeline has been shifted from late-2024 as it was advised for their imported cows to be acclimatised under more favourable weather conditions as opposed to a project delay.
“Given these conditions, we deem the project to be on track,” said the research firm in a report yesterday.
The upstream project will be an addition to existing and established operations to bring stabiliser and additive-free fresh milk to the market. UOBKH Research noted that F&N, with dairy products under its Magnolia and Farmhouse brands, has an extensive distribution network across Malaysia.
“The upstream project will allow F&N to compete more meaningfully in the ready-to-drink and powdered milk market in Malaysia, which is close to RM5bil.
“This does not include markets for dairy products such as butter and ice cream.”
Apart from this, the easing of raw-material costs and a recovery in Thailand’s tourism sector should improve immediate earnings visibility for the group.
“F&N registered an operating margin of 17.2% for Thailand in the financial year 2023 (FY23).
“Management indicated that it targets mid-teen margins for FY24, which represents a slight shortfall to its pre-pandemic levels of 19%,” added UOBKH Research.
As for the cost of raw materials, its management indicated that this is expected to weigh on Thailand’s margins.
“However, we believe this could coincide with F&N’s hedging cycle given that recent prices for its inputs have softened against FY23’s average.
“Current prices for sugar, powdered milk and packaging costs are 3.2%, 7% and 3.7% lower, respectively, in comparison with FY23’s average.
“This bodes well as it could represent some further upside to margins heading into late-FY24.”
The research firm maintains a “buy” call on the stock with a target price of RM33.60.
It said decent execution of the upstream dairy project could prompt a re-rating for F&N, given the structural growth and opportunities the segment offers.
“F&N trades at a price-to-earnings ratio of 20.8 times FY24’s forecast performance, a deep bargain to 35.9 times, which is the average of its consumer-staple peers, Nestle (M) Bhd and QL Resources Bhd,” the research firm added.
