We analyse the valuation of F&N (NOT RATED) following its latest proposal to streamline its property assets via a share distribution in specie. A key risk is the legal dispute over its stake in Myanmar Brewery.
• Details of F&N restructuring. We analyse F&N’s proposal to demerge its property business through a dividend in specie (DIS) of all its shares in Frasers Centrepoint Ltd (FCL) and the listing of FCL by way of introduction. The distribution ratio is two FCL shares for every F&N share. The proposal is subject to shareholders’ approval at an extraordinary general meeting to be convened in late-October/early-Nov 13. The book closure and listing of FCL is targeted at end-
• Our initial take. We are positive on this proposal. In our view, this will create a cleaner corporate structure and allow investors with different risk appetite to choose direct exposure to either F&N’s property or F&B business.
• Emergence of a more direct Asean F&B play. Post the restructuring exercise, F&N will emerge as a pure F&B company with a net cash of S$903m (S$0.63/share). The group’s key assets include:
a) A 55.9% stake in F&N Holdings, which is listed on Bursa Malaysia.
b) Unlisted subsidiaries including soft drinks and dairy businesses in Singapore and Malaysia as well as a 55% equity interest in Myanmar Brewery.
c) Printing and publishing business.
d) Net cash of S$903m (S$0.63/share).
e) Other investments, including a 9.5% stake in Vinamilk which is listed on the Ho Chi Minh Stock Exchange.
• Back-of-envelope estimate of F&N (excluding FCL). Our initial assessment of F&N excluding its property division is S$2.19/share. This is based on the market value of its listed assets and an assumed 17x PE for its non-listed F&B earnings.
• Coffers for accretive M&A and potential synergies. After this restructuring exercise, F&N will emerge with a net cash balance of S$903m. This will enable the group to be on the lookout for potential M&As in the F&B sector. In addition, we believe there is potential for synergies for F&N with its substantial shareholder Thai Beverage.
• Emergence of Singapore’s third-largest property group. Post the listing of FCL by way of introduction, FCL would emerge as the thirdlargest developer in Singapore (measured by units sold in 2012). FCL is a full-fledged international real estate company with strengths in the residential, commercial and hospitality segments. The group offers earnings visibility with locked-in sales of S$3.3b to be recognised over the next three years and an estimated landbank of 17.3m sf with gross development value of S$6.9b. FCL is also one of the largest retail mall owners in Singapore (12 retail malls) and owns and manages 4.4m sf of office, business and logistics space. Assuming a 10-20% discount to our RNAV estimate of S$2.75/share would suggest a valuation range of S$2.20-2.48/FCL share. Currently, we value large-cap property companies at a 10-15% discount to RNAV and mid-cap developers at a 20% discount to RNAV.
• Premium for purer plays. We think the streamlining of F&N into a purer F&B company could result in a potential re-rating as investors pay a premium for its position as a leading Asean F&B company. Using a discount of 20% for FCL, the possible valuation is S$2.20/FCL share. Based on the DIS proposal, shareholders of F&N would get two FCL shares (and assuming its disposal at S$2.20), which would imply the F&B business is valued at S$1.24/share. This compares favourably against our preliminary back-of-envelope computation of S$2.19/share for its non-property assets.
• Dispute in Myanmar. A key risk is the dispute with F&N’s partner over F&N’s 55% stake in Myanmar Brewery. In the worst-case scenario of assuming zero valuation for F&N’s stake, our fair estimate for F&N (excluding FCL) could fall to S$1.70/share (from S$2.19/share). However, management maintains there is no basis for the dispute and F&N will vigorously resist the claim.
• Key risks include rising raw material costs and integration risks with its parent company. An unfavourable outcome on the legal dispute in Myanmar is the most significant risk.
Publish date: 04/09/13