MARC Ratings has affirmed its ratings of AAAIS(cg)/MARC-1IS(cg) on F&N Capital Sdn Bhd’s Islamic Medium-Term Notes (IMTN)/ Islamic Commercial Papers (ICP) Programmes with a combined limit of up to RM3.0 billion. The rating outlook is stable. F&N Capital is a wholly-owned 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, and its long operating track record. The ratings also consider the group’s strong liquidity position and balance sheet structure as reflected by its strong cash flow generation over the years and low level of borrowings. These strengths are weighed down by the volatility of raw material costs that could impact margins, and the potential execution risk of its dairy farm venture which has faced delays in the acquisition of dairy cattle.
MARC Ratings notes that the operationalisation of F&NHB’s new integrated dairy farm on 6,736 acres of land in Gemas, Negeri Sembilan, has faced some setbacks. The Department of Veterinary Services of Malaysia had cancelled the import permit for dairy cows from the US in October 2024, and this has pushed back F&NHB’s initial January 2025 milking plans. While there was a delay in the commencement of operations of the dairy farm from the initial plan, the group has managed to find an alternative source for the same breed of dairy cows from Chile, which arrived in Gemas in April 2025. The group’s strong operations team coupled with financial and solid cash flow positions provided the ability to find an alternative source in a short time span.
The first phase of the dairy farm involved around RM1.8 billion in capex, which included land purchase, the acquisition of dairy cattle, barn construction and land clearance. MARC Ratings opines that the dairy farming segment will further strengthen F&NHB’s overall business profile, by securing milk supply for F&NHB’s products as well as enabling the group to produce more diversified products which would support the group’s future earnings. Nonetheless, the new business venture poses execution risk, although the rating agency notes that this risk is mitigated by the significant involvement of experienced professionals from the US and China, whose expertise extends to various aspects, such as strategic planning for farm layouts, procurement of both advanced farming machinery and cattle, and implementation of good farming practices.
F&NHB’s existing product offerings have continued on their growth trajectory. For the first half of financial year ended 31 March 2025 (1HFY2025), group revenue rose marginally by 1.4% y-o-y to RM2.7 billion, mainly driven by the better performance of F&B IndoChina. Pre-tax profit grew to RM430.1 million (1HFY2024: RM409.9 million). Strong growth momentum continued from FY2024, recording a 4.9% y-o-y increase in group revenue to RM5.2 billion which was also driven by the strong performance of F&B IndoChina (6.7% y-o-y). Revenue from F&B Malaysia also grew by 3.5% y-o-y and remained as the biggest segment of the group, making up 56.3% of total revenue. Operating profit margin widened to 13.53% from lower costs on several inputs and ongoing implementation of cost-efficient automation processes. Pre-tax profit improved by 11.6% y-o-y to RM697.0 million. Going forward, with the challenging outlook of future retail sales fuelled by the tariff war, any direct impact on F&NHB is expected to remain minimal at this juncture, given that sales to the US is insignificant. However, volatile raw material prices could affect its margins. F&NHB is expected to continue identifying new market opportunities and implementing cost optimisation measures to support top-line growth and maintain its margins.
F&NHB’s cash flow from operations (CFO) in 1HFY2025 stood slightly lower at RM261.8 million (1HFY2024: RM323 million). This was partly due to higher tax paid from the full utilisation of the Board of Investment incentives in Thailand. For FY2025, MARC Ratings expects the CFO to remain over RM700 million on the back of a solid market position in key product segments. Free cash flow declined to negative RM149.0 million on the back of higher capex in relation to its dairy farm venture and dividend distribution. Total borrowings stood at RM704.0 million as at end-1HFY2025. The group has an outstanding RM610.0 million under the rated sukuk programme as at end-March 2025. Sukuk maturing in August 2025 amounting to RM110 million is expected to be paid off using the group’s internal funds while RM250 million maturing in October 2025 would be refinanced under the programme. As of end-March 2025, its debt-to-equity ratio stood at 0.19x; upon the upcoming sukuk maturities, leverage position would decline to 0.16x. Liquidity remains strong with cash and bank balances of RM976.1 million as at 1HFY2025.