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Vinamilk continues to boost F&N’s value

Jeffery Tan
Jeffery Tan • 4 min read
Vinamilk continues to boost F&N’s value
(Nov 20): Fraser and Neave’s dairy business is reaping the rewards of its 18.7% stake in associate company Vietnam Dairy Products, better known as Vinamilk. This is in spite of the fact that F&N failed to raise its stake in Vinamilk at an auction held b
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(Nov 20): Fraser and Neave’s dairy business is reaping the rewards of its 18.7% stake in associate company Vietnam Dairy Products, better known as Vinamilk. This is in spite of the fact that F&N failed to raise its stake in Vinamilk at an auction held by the State Capital Investment Commission of Vietnam (SCIC).

Vinamilk is Vietnam’s largest dairy product manufacturer. It is primarily involved in the production, supply and distribution of dairy products such as powdered, liquid and condensed milk, and yoghurt. It also manufactures and sells other beverages, including soy milk, fruit juice and tea. SCIC is currently Vinamilk’s largest shareholder, with a 39.3% stake. F&N, through its wholly-owned unit F&N Dairy Investment, acquired a 5.4% stake in December last year to become the second-largest shareholder. It has been raising its stake gradually since, and publicly expressed an intention to continue doing so.

On Nov 13, conglomerate Jardine Cycle & Carriage announced that its wholly-owned subsidiary Platinum Victory would acquire 80.3 million shares in Vinamilk for US$616.6 million ($838.6 million). The 5.5% stake was being acquired on the open market as well as through successful participation in the SCIC auction.

Following the announcement, shares in Vinamilk rose to a 52-week high of VND185,200. They closed on Nov 16 at VND183,200, up 46% this year.

At that level, F&N’s stake in Vinamilk is worth VND49.7 trillion ($2.9 billion). F&N also owns 55.51% of Malaysia-listed Fraser & Neave Holdings, which closed on Nov 16 at RM25.56. Collectively, the stakes in these two entities are worth $4.6 billion. Shares in F&N, meanwhile, closed on Nov 16 at $2.61 — giving the stock a market capitalisation of $3.8 billion.

The acquisition of the stake in Vinamilk is already helping to bolster F&N’s earnings. For FY2017 ended Sept 30, F&N reported a 4.1% y-o-y decline in revenue to $1.9 billion. Earnings rose from $108 million to $1.3 billion, mostly because of a fair value adjustment related to Vinamilk. Excluding the fair value adjustment and other exceptional items, earnings actually declined from $109 million to $100 million, owing to $4 million in losses at F&N’s beverages division and $5 million in losses at the publishing and printing division.

F&N’s dairies business, however, performed well. The dairy business reported a 24.2% increase in earnings before interest and taxes to $207.6 million, thanks to an equity accounting of Vinamilk’s numbers. Phillip Securities Research analyst Soh Lin Sin estimates Vinamilk contributed $84 million, or 47%, of the group’s total Ebit.

In her Nov 13 report, Soh upgraded her call on F&N to “accumulate”, with a higher price target of $2.83 — up from $2.52. She has adjusted her earnings estimate for FY2018 upwards by 59% to account for continued strong performance in the dairies unit, benefits from restructuring initiatives and higher profit-sharing from Vinamilk with a full 12-month contribution. She is expecting Vinamilk to continue driving over 40% of the group’s Ebit going forward.

“While F&N failed to acquire [an] additional stake in this auction, we do not discount the potential of the group to acquire additional stakes via the open market,” Soh says. She expects the company to fund any potential acquisitions via borrowings and/or internally generated funds as F&N still has significant room to take on more leverage. As at end-September, F&N’s net gearing ratio was 5.3%.

According to EY, dairy consumption per capita in Vietnam is currently at US$29.60. It is forecast to increase 5% a year to US$37.50 by 2021. “The growing awareness of the health benefits of dairy products, combined with rising incomes and rapid urbanisation, is expected to spur dairy consumption growth,” Chandan Joshi, EY global emerging markets leader for consumer products and retail, tells The Edge Singapore via email.

The sales volume and value of dairy products will also rise as the price cap on milk has been removed, according to F&B research firm Mintel. Innovative value-added propositions and the continuing economic development there should also spur consumer demand. “Vietnamese consumers’ acceptance of ultra-high temperature processing and powdered milk products has also offered opportunities for importers to launch new lines, often focusing on the assurance of quality raw materials,” says Caroline Roux, food and drink research manager at Mintel.

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