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F99.SI - Fraser & Neave

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A $1.4bn beverage and diary company based in Singapore, it also owns two large equity positions:


- Fraser and Neave Holdings (55.4%) a Malay beverage and diary company with totally overlapping product suite (but different geographical targets), which it consolidates;

- Vinamilk (20.4%), the largest Vietnamese Diary farm.


The company can trace its roots back to 1883, but it is currently majority owned (87.68%) by Sirivadhanabhakdi, the founder of Thai beverage. It has some cross-holding aspects, common in family-owned companies in Asia, but the attraction of holding this entity is that it seems to be the chosen acquisition vehicle for the family (at least in the food and beverage sector). So recent investments include Emerald Brewery in Myanmar and the Starbucks franchise in Thailand, as well as continued investment in Vinamilk.


Getting the negatives out of the way first:

-F&N owns a legacy publishing and printing business that has been problematic for a few years now. They haven’t shown any inclination to get rid of it despite poor returns which now have been materially exacerbated by Covid 19. This might finally force a rethink of the business, but in the meantime it’s a drain on resources – and now loss-making.

-The F&N Singapore dairy and beverage business seems to just about break-even. Because of consolidation, its difficult to break out the exact economics, but for all intents and purposes it does not make money, although it is possible to make a case that apart from Singapore, which is a mature market, it also covers geographies with potential growth. So, unlike the printing and publishing business above, there is a potential path to generating better returns here.

-F&N has substantially increased net debt over the past 4 years as it has increased its investments (mostly to finance the Vinamilk purchase). However, even with this increase, its gearing is at 21.5%, as it started with a large net cash position. Part of the gearing increase is due to increased inventories and trade receivables as a result of Covid 19, so 18% would be a more normalised gearing (assuming they don’t get hit with receivable impairments, of which we should expect some).


Moving on to the positives:

-Price: With the sell-off this year the company appears cheap, it trades at 0.66 of tangible book (and much lower than that if you take into account the market value of the Malay stock as that trades materially above book) and 13 times my estimate of earnings (there is no analyst coverage that I could find).

-Vinamilk is one of the top listed companies by market value on the Ho Chi Minh Stock Exchange and is Vietnam’s largest dairy company, in a country where dairy consumption is 20 litres per capita, compared to the Asia average of 38 litres. Earnings have grown 12% for the last 10 years (although have been treading water for the last three despite revenue growth)

-Growth: everyone will come up with different estimates, but between Vinamilk, Emerald Brewery, Starbucks Thailand, F&N Singapore, it is fair to say there will be some growth over time, just not this year. The advantage of this investment is that it is cheap enough that growth can just be a bonus, and you are getting paid 4.2% dividend yield to wait for that growth.


And finally, the unknowns or less well knowns:

- Treatment of minority shareholders

- Priorities of the family

- Sugar tax – F&N have navigated this well so far, but if the various Asian countries implementing one become more aggressive, it may be hard to avoid a hit to revenue.

- Vietnamese policy on foreign ownership, and their upcoming elections

- Impact of a second wave of Covid, especially on the Thai and Vietnamese markets


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