RAM Ratings reaffirms F&N Capital’s AA1(s)/P1(s) ratings, with stable outlook

Published on 31 May 2012

RAM Ratings has reaffirmed the respective enhanced long- and short-term ratings of AA1(s) and P1(s) for F&N Capital Sdn Bhd’s (“F&N Capital”) RM1 billion Commercial Papers/Medium-Term Notes Programme (2008/2015) (“CP/MTN”); the long-term rating has a stable outlook. F&N Capital is a treasury company that is wholly owned by Fraser & Neave Holdings Bhd (“F&N Holdings” or “the Group”). The CP/MTN is backed by a full, unconditional and irrevocable corporate guarantee from F&N Holdings. As such, the enhanced ratings are based on the credit profile of F&N Holdings.

The ratings predominantly reflect F&N Holdings’ solid financial profile and strong leading positions in several food-and-beverage (“F&B”) segments. F&N Holdings remains a leader in the overall ready-to-drink market, despite the absence of The Coca-C ola Company (“TCCC”) brands from its portfolio after the expiry of its bottling contract with the former in September 2011. Likewise, the Group has retained its leadership in the Malaysian and Thai dairy-product markets. As some of its peers had been less affected by the Thai floods in October 2011, the Group is believed to have lost some market share during its plant closure – although post-flood market-share data has not been made available. Nonetheless, the facility has now returned to full capacity utilisation. As the dairy market in Thailand is still undersupplied, we expect the Group to regain its market share.

F&N Holdings’ financial profile has also stayed sturdy despite these setbacks, i.e. loss of contributions from TCCC products and the Thai floods, which had weakened its operational performance. “Such adversities had thinned its funds from operations (“FFO”) and necessitated a heavier debt load to fund its enlarged working capital and capital expenditure (“capex”) in the first half of FYE 30 September 2012 (“1H FY Sep 2012”). Nonetheless, its financial metrics had stayed favourable, with an annualised adjusted FFO debt cover of 0.85 times and an adjusted gearing ratio of 0.3 times,” notes Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings.

These strengths are, however, moderated by the more competitive F&B landscape. Apart from the emergence of TCCC as a competitor, the situation is exacerbated by the introduction of new TCCC products and those of other players. Likewise, competition has become increasingly keener in the dairy-products market amid the proliferation of value-for-money brands. Meanwhile, most of the small- and mid-sized manufacturers are still enjoying government subsidies on their sugar purchases, which render their products cheaper than those offered by F&N Holdings. This has compelled consumers to switch to these value-for-money brands, as reflected by the decline in the Group’s market shares in certain key segments in fiscal 2011. The Group is also vulnerable to fluctuating raw-material and packaging costs, as well as licence-renewal risk for brands not owned by F&N Holdings or its parent, Fraser and Neave Limited.

Considering the absence of TCCC brands, the more subdued performance of its Thai operations and stiffer competition, F&N Holdings is expected to post a more moderate set of results for FY Sep 2012. This may, however, be somewhat mitigated by the growth of its new and existing beverage products and revenue from contract packing for its related companies in Singapore. Contributions from its new Pulau Indah dairy plant, which has a larger production capacity than its current facility in Petaling Jaya, could also aid growth.

Similar to a year ago, the Group has allocated some RM500 million of investment outlay for potential acquisitions over the next 2 years, on top of its planned capex. “Even with a more modest near-term performance and a possibly higher debt level for its capex and potential acquisitions, the Group’s financial metrics are still considered sturdy. We expect its adjusted gearing ratio to hover around 0.3-0.5 times while its FFO debt cover is envisaged to range around 0.5-0.6 times over the next 3 years,” opines Kevin.

Media contact
Low Pui San
(603) 7628 1051
puisan@ram.com.my