Rating action       

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.

F&NHB’s entrenched market position in the dairy and beverage segments in Malaysia and Thailand, its long operating track record and healthy balance sheet remain key rating drivers. These strengths are moderated by rising raw material costs and potential execution risk on the group’s recent ventures into new business segments, namely dairy farm operations, and the manufacturing and marketing of packaged food products.

For the first half of financial year ending March 31, 2023 (1HFY2023), revenue rose 9.5% y-o-y to RM2.4 billion, largely driven by positive beverage sales as consumption recovered from pandemic-induced closures, a price and cost management strategy as well as additional contribution from Cocoaland Holdings Berhad (Cocoaland) which was acquired in November 2022. Pre-tax profit increased by 1.5% y-o-y to RM247.8 million excluding the RM89.3 million remeasurement gain of its interest in Cocoaland and other one-off non-operating items. The improved performance is also attributed to cost management initiatives. This notwithstanding, given most of the group’s input costs are for milk powder and tin packaging material for which prices remain elevated, the downside pressures on margins are likely to persist in the near term. 

MARC Ratings views the recent acquisition of Cocoaland, which manufactures confectionery and savoury snacks for both local and export markets, would broaden F&NHB’s product range and strengthen its penetration into overseas markets where Cocoaland has established a foothold. Acquired for RM489.2 million in November 2022, Cocoaland would increase the group’s top line by around 6% p.a. The rating agency also notes that with the RM215.6 million acquisition of Ladang Permai Damai Sdn Bhd which owns 2,726ha of agricultural land in Gemas, F&NHB has embarked on an integrated dairy farming project, the first phase of which would be completed by December 2024. MARC Ratings views the dairy farm project to benefit the group through vertically integrating its operation.

While we note the group has sufficient liquidity headroom to provide capex for further development, these projects pose some execution risk as they are relatively new businesses for the group. These acquisitions were part funded by borrowings which rose to RM710.0 million as at end-1HFY2023 from minimal borrowings in the past. For its existing food and beverage businesses, we do not foresee major challenges in maintaining its domination in the segments. F&NHB continues to enter into forward contracts with commodity suppliers and undertake distributions largely by its own fleet of lorries to manage cost. 

For 1HFY2023, cash flow from operations (CFO) improved to RM499.6 million while free cash flow (FCF) was positive at RM318.0 million. However, given the group’s expansion plans and its dividend payout policy, FCF could decline from its historical levels. As at end-1HFY2023, the group’s strong liquidity position was reflected by cash and bank balances of RM652.7 million. While debt-to-equity (DE) ratio rose to 0.22x as a result from these acquisitions, it remains low with net DE ratio of 0.02x.

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. It also incorporates prudent capex spending for its businesses.

Downward rating pressure could occur if F&NHB’s financial performance weakens substantially, 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.