MARC Ratings has affirmed its ratings of AAAIS(cg) /MARC-1IS(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 outlook is stable. F&N Capital is a funding vehicle of Fraser & Neave Holdings Bhd (F&NHB) which has provided an unconditional and irrevocable corporate guarantee on the programmes. Accordingly, the ratings reflect F&NHB’s credit strength.
The ratings incorporate F&NHB’s entrenched market position in the dairy and beverage segments in Malaysia and Thailand, its long operating track record, and the prospects of its fresh milk segment that would strengthen its business profile. The ratings also consider the group’s strong liquidity position and balance sheet structure, notwithstanding the expected increase in borrowings to fund its dairy business. These strengths are weighed by raw material cost increases that could impact margin, and potential execution risk on its dairy farm venture.
MARC Ratings notes that F&NHB’s new integrated dairy farm on 6,736 acres in Gemas, Negeri Sembilan, which was launched in July 2023, is steadily progressing. By November 2024, the group expects 2,000 dairy cows to arrive from the US with the first milking to start in early 2025. Subsequently, the second batch of dairy cows will arrive by April 2025. The initial phase will cost RM1.7 billion in capex, which includes the acquisition of the dairy cattle, barn construction and land clearance. Correspondingly, the group is targeting to produce about 20 million litres of fresh milk during the first year of production. The rating agency opines that the dairy farming segment will further strengthen F&NHB’s overall business profile. Nonetheless, the new business venture poses execution risk, although we note this risk is mitigated by the significant involvement of expertise from the US and China which extends to various aspects. These include farm layouts, agriculture equipment procurement and implementation of good farming practices to minimise biological risks.
For the first half of financial year ending March 30, 2024 (1HFY2024), group revenue rose by 10.7% y-o-y to RM2.7 billion, with both F&B Malaysia and F&B Thailand continuing their sales growth momentum from FY2023. On excluding one-off items, pre-tax profit grew by 63.8% y-o-y to RM406.0 million. Going forward, despite the challenging outlook for the food and beverage industry amid inflationary pressures, F&NHB’s strength in identifying new market opportunities — including dairy farming — and optimising cost by way of increasing automation and other strategies would continue to support top-line growth and margins.
Cash flow from operations (CFO) of RM1.1 billion for FY2023 reflects the timing of cash collection from the price increases on some of its key products in 3Q2022. Additionally, the CFO was supported by better performance across all of its markets that had generated higher sales, leading to a decline in inventory level. Free cash flow returned to positive in FY2023 at RM729.4 million although this could decline depending on the group’s capex plans and dividend payout policy over the near term.
Total borrowings stood at RM708 million as at end-1HFY2024 (FY2022: RM246.8 million) with the increase in recent years being due to part funding the acquisition of Cocoaland Holdings Berhad and the Gemas land for the dairy farm. Currently, the group has an outstanding RM610.0 million under the rated programme and expects to draw down a further RM150.0 million by end-FY2024 and RM350.0 million in early FY2025. Proceeds would be utilised to fund its dairy operations in Gemas. Despite the increase in borrowings, its leverage position as reflected by the debt-to-equity ratio is low at 0.20x and this is expected to rise to about 0.31x over the near term. Liquidity remains strong with cash and bank balances of RM1.1 billion as at 1HFY2024.