Published on 02 Oct 2019.
RAM Ratings has reaffirmed the respective AA1(s)/Stable and P1(s) ratings of F&N Capital Sdn Bhd’s RM750 mil MTN Programme (2013/2028) and RM750 mil CP Programme (2013/2020). The debt facilities are backed by full, unconditional and irrevocable corporate guarantees from F&N Capital’s parent, Fraser & Neave Holdings Bhd (F&N Holdings or the Group). As such, the ratings reflect the credit profile of the Group.
The reaffirmation of the ratings is based on the performance of F&N Holdings, which is largely within our expectations. The Group is anticipated to retain its dominance in the Malaysian F&B industry. While its market shares in most of its domestic product segments have been declining, the Group has managed to solidify its stronghold in the isotonic beverage segment as well as its leadership in the Thai canned milk market.
Despite flattish sales growth, F&N Holdings delivered stronger operating profit before interest, depreciation and tax in both in FY Sep 2018 and 9M FY Sep 2019, mainly thanks to benign input costs. The Group also retained its net-cash position as at end-September 2019. F&N Holdings has been able to maintain its strong debt coverage, with a funds from operations debt cover (FFODC) of about 1.0 time. Its FFODC came up to 3.54 times in 9M FY Sep 2019 amid healthier operating profit and a lighter debt load. Given these credit metrics, F&N Holdings is considered strongly positioned in its rating category, with some room to absorb potential discretionary spending without significantly impairing its credit profile.
Effective 1 July 2019, a 40 sen tax per litre has been imposed on beverages containing more than five grams of sugar per 100 ml. Since the announcement of this tax in November 2018, F&N has been accelerating efforts to reformulate its products. At present, over 90% of its beverages have been reformulated with much lower sugar content (using alternative sweeteners in place of sugar). While the higher cost arising from the reformulation is passed on to consumers, the quantum of such price increases is minimal and unlikely to dent sales. The Group’s other offerings that are subject to tax will either be eventually reformulated or introduced in smaller packs to maintain their selling prices.
Meanwhile, the ratings are also supported by F&N Holdings’ dominance in several beverage and dairy segments. Despite its reduced market share, the Group still leads the overall ready-to-drink (RTD) segment in Malaysia, accounting for 24.5% of this sphere’s sales in fiscal 2018 (fiscal 2017: 25.5%). We note that F&N Holdings has a diversified product line-up and enjoys some degree of geographical diversity (via its operations in Thailand and rising exports). That said, the Group’s soft-drinks operations depend much on 100Plus, which generates half of the division’s sales volumes and substantially all of its profit.
On the other hand, the ratings are moderated by the competitive operating landscape. Intense rivalry within the Malaysian RTD market has affected the Group’s market share. In carbonated soft drinks, F&N Holdings’ market share has been declining for five consecutive years, from 28.0% in FY Sep 2014 to 24.0% in 9M FY Sep 2019. Similarly, its share of the domestic sweetened condensed milk market has also shrunk, from 59.0% to 51.8% over the same period. Given that F&N Holdings’ costs mainly stem from raw materials and packaging, its profit margins are susceptible to the price volatility of these items.
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Ratings on F&N Capital Sdn Bhd