Thursday, 6 July 2017

(The Edge Financial Daily) F&N’s 100PLUS-McDonald’s tie-up to drive profit

Fraser & Neave Holdings Bhd
(July 5, RM25.30)
Maintain hold with a target price of RM27.41:
Yesterday, media reported that McDonald’s Malaysia will start serving Fraser & Neave Holdings Bhd’s (F&N) ready-to-drink 100PLUS at all of McDonald’s outlets across Malaysia.

According to F&N, the partnership has been devised for two years and has been trialled at 10 McDonald’s outlets in major towns for four months. Note that 100PLUS will be the first F&N product to be served at a quick-service restaurant network in Malaysia.

Moreover, F&N and McDonalds have been working closely to incorporate 100PLUS into the menu offerings and leverage on the upcoming Southeast Asian Games events as both of them are sponsors.

McDonald’s Malaysia currently has 262 outlets nationwide. It plans to invest RM1.4 billion to increase the number of outlets to 450 by 2025 across the country.

With a customer base of 169 million people, McDonald’s expects this to grow further by a double-digit percentage this year.

Management guided that F&N production hubs in Shah Alam, Kuching and Kota Kinabalu will be able to meet demand from McDonald’s outlets.

Prior to this partnership, we assumed the total utilisation rate for all soft drink operations to be at 80% for the financial year ending Sept 30, 2017 (FY17) from a total estimated capacity of 160 million litres to 165 million litres per year.

Post partnership, we believe that this will ramp up production by 5% and 10% for FY17 and FY18 respectively.

Furthermore, we have done a quick survey on the likelihood of consumers (samples were taken from 16 of our colleagues at TA Research) to opt for 100PLUS with their McValue Meals.

We find that generally 50% of people would opt for the isotonic drink due to it being a healthier choice.

Given the competitive pricing strategy adopted by the group, we have increased our revenue projections slightly by 0.9% and 1.7% for FY17 and FY18 respectively.

We are positive about the partnership as this would diversify its sales channel to attain a sustainable revenue stream from the partner, cost savings from economies of scale and create more brand awareness across a bigger market base.

Overall, we raise our earnings forecasts by 0.4% and 0.7% for FY17 and FY18 to factor in potential earnings growth from the partnership. — TA Securities, July 5