F&N (3689) - Fraser & Neave Holdings - Bid farewell to Red Bull
Target RM23.33 (Stock Rating: ADD)
F&N announced that its distributorship of Red Bull energy drinks in Malaysia will end on 30 September 2015. We view this as a temporary blip and believe that the company will be able to recover quickly, given (i) its track record in dealing with the termination of the Coca-Cola franchise in 2010, and (ii) its wide distribution network that would help to mitigate the loss of sales from the Red Bull termination. We cut our FY16-17 earnings forecast by 6-8% as we remove the earnings contribution from Red Bull. While this lowers our DCF-based target price, we maintain Add on F&N. Potential rerating catalysts include higher market penetration, more product cross-selling, cost synergies with TCC group, and the recovery of margins in Thailand.
What Happened
F&N announced that it has entered into a transition agreement with Allexcel whereby F&N’s distributorship of Red Bull energy drinks in Malaysia will not be renewed upon its expiry on 31 March 2015. As such, a transition period will be effect from 1 April 2015 to 30 September 2015. F&N had previously secured a 5-year contract to distribute Red Bull drinks in April 2010.
What We Think
This negative development did not come as a total surprise to us as speculation of F&N losing the contract had been circulating in the market for the past few weeks. The contract was terminated despite F&N’s ability to double Red Bull’s sales volume from 2m cases in Apr 2010 to 4m cases. Based on our estimates Red Bull, which has a 70% share of the energy drink market, could be contributing more than RM200m to F&N’s revenue (~5% of total revenue), and more than 5% of F&N’s net profit as Red Bull commands good margins. Although the loss of the contract would hit F&N temporarily, based on its track record in dealing with the Coca-Cola contract termination (in Sep 11), we believe the company would be able to recover quickly. F&N’s sales almost recovered to pre-termination levels within two years, despite its Thai operations being hit by the floods from mid-2011 to early-2012. With Red Bull’s departure, F&N could shift its focus back to building up its own brand and new product launches. It could also now fill up its chillers that were previously occupied by Red Bull drinks with its own products. Chillers in the market are limited and F&N has the largest number of chillers in the country.
What You Should Do
We expect this news to have a knee-jerk reaction on F&N’s share price. We advise investors to accumulate on share price weakness.
Source: CIMB Daybreak - 30 March 2015
Target RM23.33 (Stock Rating: ADD)
F&N announced that its distributorship of Red Bull energy drinks in Malaysia will end on 30 September 2015. We view this as a temporary blip and believe that the company will be able to recover quickly, given (i) its track record in dealing with the termination of the Coca-Cola franchise in 2010, and (ii) its wide distribution network that would help to mitigate the loss of sales from the Red Bull termination. We cut our FY16-17 earnings forecast by 6-8% as we remove the earnings contribution from Red Bull. While this lowers our DCF-based target price, we maintain Add on F&N. Potential rerating catalysts include higher market penetration, more product cross-selling, cost synergies with TCC group, and the recovery of margins in Thailand.
What Happened
F&N announced that it has entered into a transition agreement with Allexcel whereby F&N’s distributorship of Red Bull energy drinks in Malaysia will not be renewed upon its expiry on 31 March 2015. As such, a transition period will be effect from 1 April 2015 to 30 September 2015. F&N had previously secured a 5-year contract to distribute Red Bull drinks in April 2010.
What We Think
This negative development did not come as a total surprise to us as speculation of F&N losing the contract had been circulating in the market for the past few weeks. The contract was terminated despite F&N’s ability to double Red Bull’s sales volume from 2m cases in Apr 2010 to 4m cases. Based on our estimates Red Bull, which has a 70% share of the energy drink market, could be contributing more than RM200m to F&N’s revenue (~5% of total revenue), and more than 5% of F&N’s net profit as Red Bull commands good margins. Although the loss of the contract would hit F&N temporarily, based on its track record in dealing with the Coca-Cola contract termination (in Sep 11), we believe the company would be able to recover quickly. F&N’s sales almost recovered to pre-termination levels within two years, despite its Thai operations being hit by the floods from mid-2011 to early-2012. With Red Bull’s departure, F&N could shift its focus back to building up its own brand and new product launches. It could also now fill up its chillers that were previously occupied by Red Bull drinks with its own products. Chillers in the market are limited and F&N has the largest number of chillers in the country.
What You Should Do
We expect this news to have a knee-jerk reaction on F&N’s share price. We advise investors to accumulate on share price weakness.
Source: CIMB Daybreak - 30 March 2015
