RAM Ratings has reaffirmed the respective AA1(s)/Stable and P1(s) ratings of F&N Capital Sdn Bhd’s (F&N Capital) RM750 million MTN Programme (2013/2028) and RM750 million CP Programme (2013/2020).

Published on 21 June 2016

RAM Ratings has reaffirmed the respective AA1(s)/Stable and P1(s) ratings of F&N Capital Sdn Bhd’s (F&N Capital) RM750 million MTN Programme (2013/2028) and RM750 million CP Programme (2013/2020). The debt facilities are backed by full, unconditional and irrevocable corporate guarantees from F&N Capital’s parent, Fraser & Neave Holdings Bhd (F&N Holdings or the Group). As such, the ratings are based on the credit profile of the Group.

The reaffirmation of the ratings reflects the continued strong performance of F&N Holdings, consistent with our expectation. Despite the termination of F&N Holdings’ right to distribute Red Bull and selected products from Nestle SA, the Group’s sales grew 3.9% y-o-y in 1H FY Sep 2016, led by the still-healthy growth of its Thai operations. The Group’s operating performance benefited from benign raw material prices, especially in 1H FY Sep 2016, when operating profit before depreciation, interest and tax (OPBDIT) surged 65.4% y-o-y. While higher capex and competitive pressures may weaken the Group’s credit metrics in the next 2 years, we expect its overall financial profile to remain robust.

F&N Holdings’ adjusted gearing ratio was kept at a conservative 0.21 times as at end-September 2015. In addition, the Group reached a net-cash position with a cash balance of around RM412 million against total adjusted debt of about RM397 million. The jump in operating profits had pushed up the Group’s adjusted FFODC to 1.46 times (annualised) in fiscal 2015. “Notwithstanding higher combined capex of RM300 million in fiscal 2016 and 2017 (fiscal 2015: RM82 million) and a potentially narrower profitability margin, F&N Holdings’ gearing ratio is projected to be around 0.3 times while its FFODC is not envisaged to dip below 0.7 times,” said Kevin Lim, RAM’s Head of Consumer and Industrial Ratings.

The ratings continue to be supported by F&N Holdings’ dominance in several food-and-beverage segments as well as its diversified product range and geographical presence. The Group leads the overall ready-to-drink segment, with a market share of around 28% as at end-March 2016. Likewise, the Group has retained its leadership of the Malaysian and Thai dairy-products markets. With 7 categories of beverages and 4 types of milk products, the breadth of its brand portfolio enables F&N Holdings to capture the entire spectrum of the consumer market. That said, within its soft-drinks operations, the Group exhibits a relatively high dependence on the sale of 100Plus, which contributes around 51% of the division’s sales volumes. Meanwhile, the Group’s Thai dairy operations and export sales offer some geographic diversification, collectively accounting for over 40% of sales in FY Sep 2015.

The ratings are, however, moderated by the increasingly challenging industry landscape. Intense competition has further eroded the Group’s market share within the carbonated soft drinks (CSD) segment. With deep pockets for advertising and marketing, The Coca-Cola Company (TCCC) has extended its lead against F&N Holdings. TCCC’s market share came up to 45% in 1H FY Sep 2016, against F&N Holdings’ 25% (FY Sep 2014: 36% versus 28%). Soft consumer sentiment brought on by the implementation of the GST and the weak ringgit had also led to higher trade discounting across the industry. Additionally, given that F&N Holdings’ costs mainly stem from raw materials, packaging and fuel, its profit margins are susceptible to the volatility of the prices of these items. The Group’s OPBDIT margin is expected to narrow if input costs rise.

F&N Holdings’ credit profile mirrors that of its parent, Singapore-based F&N Limited, given the very close relationship between the 2 entities. Accordingly, changes in the latter’s credit profile may have an impact on the Group. Rating upside is limited at this point in view of uncertainty on how F&N Limited will deploy proceeds from the sale of Myanmar Brewery Limited as well as whether it will be able to achieve meaningful business diversification and maintain its financial profile over the medium term.

Media contact
Amy Lo
(603) 7628 1078
amy@ram.com.my