View Credit Analysis Report (6053671)

SubcategoryConsumer Products - Food Products
Date Article2021-06-03 00:00:00
Rating action     
MARC has assigned ratings of AAAIS (CG) /MARC-1IS (CG) to funding vehicle F&N Capital Sdn Bhd’s (F&N Capital) 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 subsidiary of Fraser & Neave Holdings Bhd (F&NHB) which has provided unconditional and irrevocable corporate guarantee on the programmes.

The ratings reflect F&NHB’s very strong and consistent financial performance from its well-established dairy and beverage lines in Malaysia and Thailand, its low borrowings relative to its operations and its consistently very high liquidity position. Notwithstanding these strengths, the group faces competitive pressures in the fragmented food and beverage (F&B) segment, which has weighed on its domestic sales growth.

F&NHB is one of the most established F&B groups in the region with an extensive operating track record. The group has a leading market position in Malaysia’s isotonic drink, sweetened condensed and evaporated milk segments; and in Thailand, it also has a leading market share in the evaporated, condensed, and sterilised milk segments as well as in the ultra-high temperature processing (UHT) milk segment. It carries a wide range of products marketed under well-known brands; it also has longstanding exclusive rights to manufacture and market “Nestlé” dairy products. 

F&NHB operates eight plants, six in Malaysia and two in Thailand. The Malaysian plants have substantially higher capacities, given their lengthy operating record, and cater mainly to the domestic, Thailand and Singapore markets, whereas the Thai plants serve the growing Indo-china market. Aside from maintenance and currently committed ongoing capital expenditure, there are not expected to be any substantial capital expenditure envisaged over the short term.

The group’s key cost components are raw materials and distribution costs. Its raw materials which include palm oil and sugar as well as packaging materials such as aluminium and tin are subject to commodity price volatility. To mitigate the volatility, the group enters into forward contracts with commodity suppliers; distribution is undertaken by its own fleet of lorries and to some extent third-party transportation. Gross margins have remained around 30% over the last five years.

Group revenue stood at RM4.0 billion as at end-September 2020 (FY2020). Contribution to total revenue from the F&B Thailand segment has steadily increased, accounting for 49% in FY2020, up from 39% in FY2016 (RM1.6 billion). Sales growth from its Thai operations has offset the decline in its Malaysian sales in recent years and the Thai region will continue to be a key growth market. F&NHB has also implemented cost-saving initiatives and tighter cost control which have contributed to improving its operating profit margin in recent years. Operating profit margin stood at around 13% in FY2020. The group also established its first international office in Dubai, which will serve as a regional office for the Middle East and North Africa (MENA); it has also expanded its network to seven new countries to further strengthen its revenue base.

F&NHB has low borrowing levels, standing at RM80.6 million at end-1QFY2021, translating to a very low debt-to-equity (DE) ratio of 0.03x. Its healthy cash position, which stood at RM680 million has been supported by moderate dividend payout, averaging RM216.3 million p.a. over the last five years.

Rating outlook

The stable rating outlook assumes F&NHB will maintain its credit profile as the group undertakes initiatives to make further inroads into overseas markets.

Rating trajectory

Downside scenario     

Downward rating pressure could occur if F&NHB’s financial performance weakens and leads to a deterioration in its liquidity position and/or if there is a sharp increase in leverage level.

Key strengths
  • Long operating track record with entrenched market position in dairy and beverage products
  • Economies of scale and scope for its wide product range
  • Healthy and steady revenue generation
  • Very strong cash position

Key challenges/risks

  • Raw material price fluctuations could weigh on operating margins
  • Increased competitive pressures, mainly in the Malaysian market 

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