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 Medium-Term Notes Programme (2013/2028) and RM750 million Commercial Papers Programme (2013/2020). The debt facilities are backed by full, unconditional and irrevocable corporate g

Published on 10 Jul 2017.

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 Medium-Term Notes Programme (2013/2028) and RM750 million Commercial Papers 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 reflect the credit profile of the Group.

The reaffirmation of the ratings is based on the performance of the guarantor, F&N Holdings, which largely came in within expectations. The Group is anticipated to retain its position as a dominant player in the food and beverage (F&B) industry in spite of a challenging operating environment. Further, we expect its overall financial profile to stay robust notwithstanding high capex requirements. 

F&N Holdings recorded another year of revenue and earnings growth in FY Sep 2016, as a result of the stronger showing of its Thai operations (F&B Thai). F&B Thai’s top line grew 8.5% given a weaker ringgit against the Thai baht while its operating profit surged 79.7%, mainly due to lower milk-based raw material prices. Meanwhile, F&B Malaysia – which together with F&B Thai makes up the Group’s 2 key business divisions – saw a slight decline in revenue and operating profit, having been affected by the persistently weak consumer sentiment, stiff competition and lost sales from Red Bull. The Group’s ongoing internal restructuring has also had an impact on sales to a certain extent. 

In 1H FY Sep 2017, the Group’s performance was flattish y-o-y as the weaker showing of its Malaysian soft drink operations was again offset by a higher contribution from its Thai dairy business. In terms of market share, while F&N Holdings’ charted growth in the canned milk segment in Thailand, its share in the overall ready-to-drink (RTD) and canned milk segments in Malaysia slipped slightly. Going forward, F&N Holdings’ Malaysian operations are expected to continue to face stiff competition and poor consumer sentiment, while sales could remain affected by the Group’s ongoing restructuring exercise.  

F&N Holdings continues to boast a strong financial profile. The Group has been in a net-cash position since fiscal 2015 while its annualised adjusted FFO debt coverage stayed superior at 1.34 times in 1H FY Sep 2017 (FY Sep 2016: 1.01 times). Notwithstanding hefty capex requirements of around RM500 million over the next 3 years, the Group’s adjusted gearing and net gearing ratios are expected to stay conservative at around 0.3 times and 0.1 times, respectively, while its adjusted FFO debt coverage is anticipated to remain robust at around 0.7 times during the same period.

Furthermore, the ratings continue to be supported by F&N Holdings’ dominance in several beverage and dairies segments as well as its diversified product range and geographical presence. Despite a reduced market share, F&N Holdings still lead the overall RTD segment in Malaysia, with respective market shares of around 29% and 26% in FY Sep 2016 and 1H FY Sep 2017. With 7 categories of beverages and 4 types of milk products, the breadth of its brand portfolio enables the Group 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. Meanwhile, F&N Holdings enjoys some degree of geographic diversity via its operations in Thailand and growing exports.

The ratings are, however, moderated by the competitive operating landscape. Intense competition within the RTD market in Malaysia has eroded the Group’s market share, especially as rivals roll out products with smaller packaging at lower prices. 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. While the Group is expected to continue to enjoy low milk-based input prices this year, the uptrend in aluminium and tin prices as well as higher sugar input prices could dilute its margins going forward.

F&N Holdings’ credit profile is closely linked to that of its parent, F&N Limited, considering the very close relationship between the 2 entities. Accordingly, changes in the latter’s credit profile may have an impact on the Group. Nevertheless, rating upside is limited at this point in view of uncertainty stemming from F&N Limited’s merger and acquisition strategy as well as whether it will enable F&N Limited to achieve meaningful business diversification and maintain its financial profile over the medium term. 

Analytical contact
Chan Yisze
(603) 7628 1111
yisze@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162