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

Published on 13 June 2011
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’s enhanced ratings are based on the credit-risk profile of F&N Holdings, the provider of the unconditional and irrevocable corporate guarantee on the CP/MTN.

The reaffirmed ratings reflect F&N Holdings’ leading position in several food-and-beverage (F&B) business segments, strong balance sheet, robust cashflow-protection measures, diversified product range, modest geographical presence, expansive distribution channels and stable product demand. The ratings are, however, moderated by the more competitive and challenging landscape in the F&B market, the Group’s exposure to fluctuating raw-material and packaging costs, and the licence-renewal risk for brands not owned by F&N Holdings or its parent company, Fraser and Neave Limited.

As the Group’s manufacturing and distribution of products under licence from The Coca-Cola Company (TCCC) is coming to an end in September 2011, the financial performance of F&N Holdings’ soft-drinks division is envisaged to soften, particularly in FYE 30 September 2012 (FY Sep 2012).

TCCC products account for some 12%-16% of the Group’s sales and operating profit before interest and tax (OPBIT). “As more TCCC products are expected to be introduced in the local market, along with new launches from other producers, the soft-drinks sector is expected to become more competitive. Likewise, F&N Holdings’ peers in the dairy-products market have been actively expanding their market shares. Due to the capacity limitations of the Group’s dairy plant in Petaling Jaya, it has not been able to respond to such competition, thereby allowing its rivals to gain market share,” notes Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings.

Nonetheless, F&N Holdings’ capacity constraints are expected to be resolved upon the commencement of its dairies plant in Pulau Indah. Coupled with its plans to continue launching new products (both in the dairies and soft-drinks markets), the Group is envisaged to stay dominant in these sectors.

To further strengthen its foothold in the F&B market, F&N Holdings is on the lookout for potential acquisition targets, both domestic and regional. While acquisition targets have yet to be identified, the Group has budgeted around RM500 million for such investments over the next 2 years, besides RM564 million of capital expenditure (capex) for the next 3 years.

“The decline in financial performance, potential increase in debt level to fund its planned capex and budgeted cash outflow for potential acquisitions are expected to thin F&N Holdings’ funds from operations debt cover to 0.40 times in FY Sep 2012, before it recovers to 0.60 times the following year. Nevertheless, the Group’s balance sheet is expected to remain sturdy, with a net gearing ratio of 0.4 to 0.5 times over the next 3 years,” opines Kevin Lim.

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