KUCHING: Fraser & Neave Holdings Bhd (F&N) will continue to see gains from its counterpart in Thailand as can be seen by its FY19 operating profit rising by 23.4 per cent year on year (y-o-y) to RM520.4 million driven by F&B Thailand.

This was due to effective tax rate rising to 23 per cent versus 8.9 prior to this as its Thailand operation had fully utilised tax incentives granted by Thailand Board of Investment.

MIDF Amanah Investment Bank Bhd (MIDF Research) gathered that management is in the midst of applying for new tax incentives there.

“Nonetheless, we believe this will not significantly lower the effective tax rate as more than 75 per cent of the RM450 million total capital expenditure in FY20 will be directed to investment in its Malaysian operation,” it said in a company update after F&N’s result announcement on Wednesday.

It saw that F&B Malaysia continue to face pressure amidst the continuous intense competition in the canned milk and ready-to-drink (RTD) segments. This translated into an inferior performance relative to its Thailand operation (operating profit marginally higher by +2.4%yoy).

“Therefore, we believe that the new dairy farming project could give the local operation a much needed boost in terms of earnings sustainability,” MIDF Research added.

“Nonetheless, we understand that venturing into dairy farming is not an easy feat given failures of similar projects undertaken by other parties in the past.

“With careful planning, we estimate that the dairy farming project could take at least five years before it can give a meaningful profit contribution to the group.”

As the recently announced plan to venture into an integrated dairy and crop farming project with a total capital expenditure (capex) of RM650 million is still subject to approval, Kenanga Investment Bank Bhd (Kenanga Research) saw that F&N was reluctant to commit on the potential contribution that it could yield.

“Nonetheless, we are positive on the long-term benefits from this venture as we believe the facilities would allow the group to expedite its growth within the

fresh milk segment, on the back of more competitive cost advantages,” it said in a separate note.

“With majority of dairy consumed in Malaysia made almost entirely from imported milk powder, we believe the group’s ambition in the fresh liquid milk sector also jives with the shift in consumer trend towards a healthier and sustainable food future, as fresh milk is supposedly a healthier option than powdered milk.

“All-in, we reiterate our view with this being a longer-term prospect, hence ruling out any earnings accretive development over the next two years.”

MIDF Research concurred with this view, adding its belief that the group’s earnings will continue to grow, driven by the better prospect for F&B Thailand following the aggressive investment in brand spending and new product launches.

“We also believe the segment has plenty of room for expansion given the relatively bigger market size,” it added. “Meanwhile, the near-term outlook for F&B Malaysia remain challenging in view of competitive price pressures and intensifying competition especially in the canned milk and beverage segment.

“Nonetheless, its latest dairy farming project could revive the segment long-term outlook as it will provide the group with capability to insource the supply of fresh milk to support existing  downstream production and distribution of fresh milk products.

“As the project is still at its infancy stage and the land acquisition at Ladang Chuping, Perlis has yet to be finalised, we expect no meaningful contribution in the near to midterm.”