MARC Ratings has affirmed its ratings of AAA_IS(cg)/MARC-1_IS(cg) on F&N Capital Sdn Bhd’s Islamic Medium-Term Notes (IMTN) and Islamic Commercial Papers (ICP) programmes with a combined limit of up to RM3.0 billion. The ratings outlook is stable. F&N Capital is a wholly-owned funding vehicle of Fraser & Neave Holdings Bhd (F&NHB) which has provided an unconditional and irrevocable corporate guarantee on the programmes. Accordingly, the ratings reflect the credit strength of F&NHB. The total outstanding stood at RM1.0 million IMTN as at end-June 2022. 

The affirmed ratings are driven by F&NHB’s strong revenue generation from its well-established dairy and beverage lines in Malaysia and Thailand, as well as a very low leverage and high liquidity position. These strengths are moderated by margin pressures from rising raw material costs and prevailing stiff competition in the food and beverage (F&B) industry.

For the financial year ending September 30, 2021 (FY2021), group revenue increased to RM4.1 billion with the Malaysian (F&B Malaysia) and Thai (F&B Thailand) operations contributing about 51% and 49%. Sales growth of 4.4% y-o-y to RM2.1 billion from F&B Malaysia in FY2021 was supported by recovery due to the easing of pandemic-related restrictions while a sales growth of 2.6% y-o-y to RM2.0 billion from F&B Thailand was in line with those posted in recent years. The momentum continued in 1HFY2022 with revenue increasing by 1.8% y-o-y to RM2.2 billion. However, due to sharp increases in raw material prices and packaging costs, group pre-tax profit declined by 26.2% y-o-y to RM220.1 million. Accordingly, operating profit margin fell to 9.8% in 1HFY2022 from 13.6% in 1HFY2021. Given that 87% of the production cost comprises raw and packaging materials in FY2021, we view operating profit margins would come under further pressure in the near term as commodity prices continue to rise.

We understand that to ease margin pressures going forward, the group will adjust product pricing gradually.  In regard to supply chain issues, the group sources raw materials from multiple suppliers and maintains inventory holding of up to three months to avert supply disruptions. To mitigate cost pressures, the group will continue to enter forward contracts with commodity suppliers and undertake distributions largely by its own fleet of lorries. F&NHB is exposed to forex volatility given that about half of its operations are in Thailand. This is reflected in the decline in F&B Thailand’s operating profit to RM369.4 million (FY2020: RM381.0 million) which was due to strengthening of the ringgit against the Thai baht. 

Cash flow from operations (CFO) increased to RM623.3 million in FY2021. Aside from maintenance and ongoing upgrading of its plants and warehouses in both Malaysia and Thailand, capex is expected to be a moderate RM111.0 million in FY2022. F&NHB has very low borrowing levels, with only RM1.0 million outstanding under the rated programme as at end-1HFY2022. It has healthy cash holdings of RM319.9 million. Relative to CFO generation, dividend payout has been moderate, averaging RM215 million p.a. over the last five years. 

Its performance in 1HFY2022 was also affected by the shutdown of its Shah Alam plant during the December 2021 floods. This led to a low CFO of RM10.8 million, which is expected to rebound in 2HFY2022. We understand that flood-related damages of about RM40.2 million would be covered by insurance claims although the group is still assessing the full extent of the damage from the floods. The impact to its business was partly mitigated by built up inventory leading up to the festive season in early 2022. We continue to view the group’s considerable scale to provide operating stability and drive significant cash flow generation.

The stable rating outlook assumes F&NHB will maintain its credit profile through its established market position and healthy cash flow generation in the Malaysian and Thai markets.

Downward rating pressure could occur if F&NHB’s financial performance weakens, leading to a deterioration in its liquidity position and/or if there is a sharp increase in leverage level that does not commensurate with the current rating band.