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. The ratings reflect the credit strength of Fraser & Neave Holdings Bhd (F&NHB), as the parent unconditionally and irrevocably guarantees the debt instruments. The total outstanding stood at RM610.0 million IMTN as of August 3, 2023.

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 associated with new business ventures into dairy farm operations, and the manufacturing and marketing of packaged food products.

For the period ended March 31, 2023 (1HFY2023), revenue rose strongly by 9.5% y-o-y to RM2.4 billion owing to higher beverage sales, price and cost management strategy, and contribution from newly acquired Cocoaland Holdings Berhad. Pre-tax profit excluding one-offs improved 1.5% y-o-y to RM247.8 million over the same period. Notwithstanding the improvement, milk powder and tin prices, which are among the main raw materials for F&NHB, are expected to stay high and will likely continue to weigh on margins in the near term.

The acquisition of Cocoaland, a manufacturer of confectionery and savoury snacks, in November 2022 expands F&NHB’s geographical presence and product offerings. MARC Ratings also views its expansion into dairy farming through the acquisition of Ladang Permai Damai Sdn Bhd in October 2022 positively as this will improve F&NHB’s vertical integration; Ladang Permai Damai owns 2,726ha of agricultural land in Gemas, Negeri Sembilan. While we assess F&NHB to have sufficient liquidity headroom to cover development capex, the new businesses may carry some execution risk. The acquisitions were partly funded by borrowings, leading to an increase in outstanding debt to RM710.0 million as at end-1HFY2023 and a higher debt-to-equity ratio of 0.22x as a result. While borrowings could rise for its expansion plans, it is expected to be manageable.  

For 1HFY2023, cash flow from operations improved to RM499.6 million while free cash flow (FCF) was positive at RM318.0 million. Given the group’s expansion plans, FCF could decline from its past levels. As at end-1HFY2023, the group’s strong liquidity position is reflected by cash and bank balances of RM652.7 million.

Farhan Darham, +603-2717 2945/ farhan@marc.com.my   

Yazmin Abdul Aziz, +603-2717 2948/ yazmin@marc.com.my