Monday, September 23, 2013

F & N : Value uncapped (DBSV)

Fraser and Neave,
BUY S$5.55
STI: 3,251.78
(Upgrade from HOLD)
Price Target: 12-Month S$6.50 (Prev S$9.52)
Value uncapped

• Upgrade to BUY, as shareholders’ value is unlocked through dividend-in-specie/listing FCL
• Outcome of MBL’s arbitration uncertain, but impact on RNAV is low, at 2.5% in our worst case scenario
• Current market price implies above average 47% RNAV discount, despite FCL’s established position
• TP adjusted to S$6.50. Buy for potential 20% total return upside

Value unlocked. We see FNN unlocking value for shareholders with the proposed dividend-in-specie of its property unit, Frasers Centrepoint Limited (FCL). Shareholders will receive two FCL shares for each FNN share pursuant to this exercise. We believe both entities will be poised for further growth in their respective fields of business.

MBL arbitration outcome is uncertain, but RNAV impact minimal. Its JV partner in Myanmar Brewery Limited (MBL) has issued a notice of arbitration on FNN’s 55% stake. The outcome is unknown at this stage, but we believe in the worst case scenario, FNN will be required to sell its stake at a low price. If this happens, it may impact future F&B profits, but the effect on our current RNAV is low at c.2.5%. On the other spectrum, if FNN is able to buy out its partners’ stake, this could be viewed positively.

Current share price implies steep property discount. Stripping out the estimated value of F&B, we estimate that FCL is trading at a steep 47%/27% discount to RNAV and book value, higher than the property sector’s average of 31% and c.5%. We believe this is unwarranted, given its established position as a property company with S$3.3bn yet-to-be recognised revenue from pre-sold projects, rerating catalysts such as the launch of a hospitality REIT, and potential synergies with the TCC Group.

TP revised to S$6.50, Upgrade to BUY. We revised our TP to S$6.50, after incorporating the recent capital distribution (S$3.28/share). To derive our TP, we value FCL and FNN (ex-FCL), after applying a 30% discount to FCL’s RNAV. Upgrade to BUY for c.20% total return upside. At current price and with capital distribution/dividends, it is still below the S$9.55 General Offer price.

Key risks. Key uncertainties are potential vendor share placements to meet free float requirements, liquidity, overall property market sentiments, and outcome of MBL arbitration.

Value creation with de-merger, FCL dividend-in-specie Enhancing shareholders’ value; Upgrade to BUY, TP at S$6.50. We upgrade FNN to BUY, with a revised TP of S$6.50, based on 30% discount to property RNAV. This is also after adjusting for the S$3.28/share cash distribution which was paid to shareholders in late July. We believe the latest corporate plan to demerge FNN, with the dividend-inspecie (DIS) of Frasers Centrepoint Limited (FCL) shares will enhance shareholders’ value.

Progressing faster than expected. The break-up or demerger of FNN’s property and F&B businesses has been talked about for years. While we had expected restructuring to take place, the pace of developments has taken us by surprise, with the DIS and listing of FCL to take place by Nov/ Dec 2013.

Implying a steep 47% RNAV discount. At the current market price of FNN (c.S$5.53/share), assuming the valuation of F&B is fair, the implied valuation of its property operations is at a steep 47% discount to RNAV, or 27% discount to FCL’s proforma NAV. We believe this is unwarranted, given the continued prospects, S$3.3bn of yet-to-be recognized development property sales and quality property assets.

Splitting the house: Dividend-in-specie of FCL
Two FCL shares for each FNNshare. The Board of FNN has proposed a demerger of its property business by way of a dividend-in-specie of shares in Frasers Centrepoint Limited (FCL), FNN’s wholly-owned property unit. For each FNN share, the Board is proposing to distribute two FCL shares (dividend-in-specie [DIS]). FCL shares are also expected to be listed on the SGX by way of introduction. After this exercise, shareholders in FNN will have two FCL shares (at no extra cost) as well as the share originally held in FNN, albeit the latter being a smaller entity (after the DIS).

Recapitalisation of FCL by S$1bn. Prior to the de-merger via DIS, FNN will recapitalise FCL with a S$1bn cash injection. FNN will then distribute all of its FCL shares to the former’s shareholders, and effectively FCL will demerge with FNN after the exercise. Based on proforma figures, FCL is estimated to be in net debt/equity ratio of 0.36x.

Timeline: To be completed by Nov/Dec 2013. The proposed transaction is subject to shareholders’ approval at an EGM, which is expected to be convened in late Oct/early Nov. The expected book closure for FCL shares and listing is around late Nov and early Dec 2013 respectively.

SGX approval; free float of at least 12%. The DIS is subject to approvals of SGX. Amongst these, a free float of 12% is required, as part of SGX’s listing requirements, for the DIS and listing by way of introduction.

Shareholders’ approval. A simple majority by shareholders at the EGM is required. TCC Assets has indicated that they have the intention to vote in favour of the DIS. As such, approval by shareholders’ is considered a given.

Growth strategies for each business
Post the de-merger and DIS, FNN will retain its food and beverage, as well as the printing and publishing business. This will then allow FNN to pursue opportunities with the F&B space, and cater to investors looking specifically within this segment, compared to a diversified business structure.

We expect to see both entities pursue its growth opportunities. We discussed the growth opportunities for each – FNN and FCL, separately in the following sections.

FNN, ex-FCL – the Lion’s on prowl again.
A F&B focused company. A key advantage would be in terms of focus, akin to FNN going back to its roots, ie. F&B business. As explained above, this could attract investors who are keen to invest specifically within this space. Particularly for FNN, we believe this would be an advantage as it is backed by its dominant position in Malaysia, Singapore, and Thailand (for dairies), with established brands such as F&N brands, Seasons, 100Plus, Nutrisoy, Fruit Tree, Ice Mountain, etc.

While FNN (ex-FCL) will be a smaller entity, revenue and profits are expected to remain sizeable. We project revenues of c.S$2.6bn and PBIT of S$236m by FY15F, driven by growth in its beverage and dairy segments.

War chest of S$903m cash. Despite capitalising FCL by S$1bn, FNN will still have a net cash of c.S$903m (proforma, as 30 Jun 2013). This will allow FNN to pursue inorganic growth opportunities to build up its F&B profits to be as large as what FCL is now.

Expansion into other ASEAN countries. Currently, FNN’s F&B operations are largely focused within Malaysia, Singapore and Thailand, with fairly limited presence beyond. We understand that management will be looking towards growth in the ASEAN market, particularly Indonesia, Thailand and Indo-china countries (Vietnam, Cambodia, and Laos).

Synergies with ThaiBev. ThaiBev currently holds a 28.6% stake in FNN, and we believe post-DIS, there could be a swap between TCC Assets and ThaiBev, with the latter securing at least a simple majority shareholding in FNN eventually. Notwithstanding the above, we understand that both FNN and ThaiBev are already progressing on potential synergies, with the procurement of packaging materials as the first step.

Vinamilk investment could also be further milked. FNN currently holds a 9.5% investment stake in Vinamilk, which is currently valued at c.S$600m. With renewed sole focus on FNN, we believe there could be further opportunities for FNN to explore working with Vinamilk, or in the other extreme, realise the value of its investment.

MBL arbitration, a spoiler but RNAV impact minimal
Pending arbitration in ownership of Myanmar Brewery Limited. FNN’s exposure to the beer market in Myanmar is through its 55% stake in MBL. FNN has received a Notice of Arbitration from the lawyers representing its JV partner, Myanma Economic Holdings (MEHL), relating to the Group’s shares in MBL. We estimate that MBL accounts for c.25% of FNN (ex-FCL) profits.

What is the issue? The JV partner of MBL is Myanmar Economic Holdings (MEHL). From FNN’s announcement, we understand that MEHL is contending that FNN would have to sell all of its shares in MBL to MEHL, as there has been a change in control in FNN. FNN, on the contrary, believes that there is no basis to MEHL’s claims and “intends to vigorously resist the claim”.

History of MBL. The JV in MBL was formed in 1994, with the brewery officially commissioned on 7 May 1997. The shareholding in this JV entity was held outside of Asia Pacific Breweries Ltd. APB was the beer JV which FNN has since sold to Heineken in 2012.

We have assessed the potential impact and highlight three most probable scenarios and outcomes. In our view, an amicable settlement and status quo will be in FNN’s best interest.
a) FNN required to divest stake to partner. Since this seems to be the JV partner’s intent, while it would not impact much on our RNAV of FNN (depending on the price), it would definitely dent future earnings, and exposure to the fast growing and lucrative market. We believe there would likely be a knee-jerk reaction to FNN’s share price should this happen.

b) FNN to buy over stake from partner. It is also possible that the outcome would be for FNN to acquire the partner’s 45% stake instead. It should also not be an issue for FNN in terms of financial ability, given its strong balance sheet. Nonetheless, we reckon there is a need to review the price/valuation paid to be paid if this scenario comes true. Overall, we believe this is likely to be viewed positively.

c) Resolution of arbitration, JV status quo. In our view, this scenario would be the best outcome. While there may be uncertainties on the JV relationship going forward, we believe both parties may mutually benefit with MBL continuing, given the potential of the market, despite rising competition with the entry of new brewery players, such as Carlsberg and Heineken.

An uncertainty that one can do without; outcome yet to be known. We acknowledge that this development definitely does not bode well for FNN, particularly with the planned demerger with FCL, and that MBL is estimated to account for 25% of FNN’s profits, post-split. We expect the arbitration process to take some time, and may create some level of uncertainty in the meantime. Based on our assumptions, MBL currently accounts for c.4% of FNN’s (incl. FCL) RNAV and post-split, will account for c.12% of FNN’s value.

…but TP/RNAV impact estimated at just 2.5% if divestment is at low valuation. In the worst case scenario that FNN has to sell its shares to the JV partner, we believe the JV agreement should have provided for a valuation methodology/opinion. A divestment, if it happens, will have an impact on future profit streams for FNN, but unlikely to make a big dent in our RNAV. The independent financial advisor’s valuation of MBL (in shareholders’ circular dated 11 Oct 2012) is at a range of S$211m to S$667m. Our current valuation is S$450m, roughly at the mid-point. Assuming MBL is sold at the low end, this could reduce our TP/ RNAV by c.S$0.165/share, or just 2.5% to our current TP.

We are currently attributing a value of S$450m to FNN’s 55% stake in MBL, which is about 4% of our RNAV for FNN (incl. FCL). At the current market price of FNN (at c.S$5.53), it would imply that FCL is trading at a discount of 47% to our RNAV. If the value of MBL is even higher (than our current estimate), this would imply that FCL is trading at an even higher discount.

Frasers Centrepoint Limited – the house is on strong foundations.
A diversified property player in its own right. In our view, after the de-merger, FCL will also be of a credible size. While FCL has operated under the FNN conglomerate structure (since the privatisation of Centrepoint Properties Limited, FCL’s predecessor), it is able to function on its own and has built up a credible asset size over the years. It currently has gross assets of about S$9bn and will have an equity base of S$5.9bn post-capitalisation by FNN.

Merits and price catalyst remain despite split from parent. We believe FCL, in itself, merits an investment. Despite splitting from FNN after the proposed DIS exercise, we continue to see stable profits as well as potential share price catalysts. These are: (i) S$3.3bn in yet-to-be recognized property development revenues; (ii) continued development of properties; (iii) potential re-rating from hospitality REIT listing; (iv) potential synergies with TCC Group; (v) implied market price suggests steep 47% discount to property RNAV.

Underpinned by yet-to-be recognised development property sales. As per our previous report on FNN, FCL continues to have a substantial portion of unrecognised sales. The latest estimate amounts to c.S$3.3bn which is expected to be recognised over the next 24 months or so. Of these, S$2.4bn is from Singapore, with the remaining from Australia and China. This should underpin development property profits over the next couple of years.

Development of 18m sq ft of land bank supports longer term growth. Notwithstanding the challenges arising from property measures and macro headwinds, FCL still has about 18m sq ft of land bank within its key markets, with majority in China. This will support FCL’s growth over the longer term. Its land bank in Singapore stands relatively low, at around 1.5m sq ft or 1,600 units, equivalent to about one year or so of sales.

Fruition of H-REIT should serve as a price catalyst. FNN/ FCL has previously made known its intention for a hospitality REIT, on top of the retail and commercial REIT it already has - namely Frasers Centrepoint Trust (FCT) and Frasers Commercial Trust (FCOT). Plans were previously held back by its relatively small owned asset base, despite managing a total of over 7,000 keys (of which 5,000 keys are under management). It now has built up and owns an asset base of c.S$1.65bn with about 2,400 keys, which management believes could be a right size coupled with potential asset management of c.3,700 keys from the TCC Group.

Potential synergies with TCC Group. Along with the DIS of FCL, TCC Group has also granted FCL the Right of First Refusal (ROFR) over any opportunity to invest, develop or manage TCC Group’s real estate assets globally, except Thailand. TCC Group has property exposures in Thailand, as well as across the globe.

FNN’s current price implies FCL trading at 0.53x P/RNAV and 0.73x P/NAV. Our RNAV for FCL stands at S$8.2bn (or S$5.67 per FNN share). Applying a 30% discount to property RNAV, in line with industry average and property companies under our coverage (such as Keppel Land and Capitaland), we derive a value of S$3.97 for FCL per FNN share.
At the current price, we believe the discount accorded to FNN is too wide at 47% discount to RNAV and 27% discount to book value, given its large unrecognised revenue pool from pre-sold projects and established presence in the key markets and property segments.

Yishun land tender is high but returns may be achieveable
Recent Yishun land bid tender raise land bank. FCL recently tendered for and won two government land sale sites, namely at Cecil Street and Yishun Central in Singapore. The latter tender came in at 47% above the second highest bidder, and raised some eyebrows on whether FCL has been overly aggressive in its bid. While we believe the tender would have been better at a lower price, we do see the merits in the site. We believe it was a strategic and defensive move, as it owns the Northpoint Shopping Centre.

Top dollar for prime site. FCL’s bid was S$1.428bn (S$1,077 psf ppr), for the mixed-use plot at Yishun Central. The site is situated across from Yishun MRT station, adjacent to Frasers Centrepoint Trusts’ Northpoint Shopping Centre. The residential development will eventually sit on top of a bus interchange, community centre and retail mall.

Premium but achievable land price. Based on our estimation, the residential component should be launched at c.S$1,200 to S$1,400psf. This implies a capital value for its retail component of above S$3,000 psf NLA and a forward average rent of above S$20 psf pm based on a cap rate of 5.4%. We estimate this should enable FCL to secure a project IRR of over 5%.

Bid could be lower on hindsight... Notwithstanding the above, given the 47% premium over the second bidder, FCL’s bid could have been lower on hind-sight. However, what seems like an aggressive stance may be driven from a defensive and strategic position, coupled with its track record.

Defensive and strategic intent from the retail perspective. In our view the bid price for the land has included a forward pricing element and is backed by a strong strategic and defensive intent. Given the company’s long familiarity and operating history in Yishun, and its ownership of Northpoint Shopping Centre (through FCT) there could be plans to link the malls in the future.

FCL will have a dominant retail footprint in the north. Furthermore, the expected retail mall (based on our split between residential and retail) is expected to be almost double that of Northpoint, and hence, the bid could have be undertaken from a defensive position to protect FCL’s dominant position in the area. With the completion of and combining Northpoint’s NLA of 234k sq ft, the two retail malls will likely serve as an attractive destination as the largest retail floor area in the northern part of Singapore.

History may justify bid – verdict is still out. At this stage, the bid seems to be over the top, with the glaring premium over the second bidder. However, looking back to 2011, FCL had also bid for a mixed development site at Punggol which was then above market expectations, at a 20% premium to the second highest bid. Then, the expected ASP for residential units was S$900 psf, but Watertown was eventually launched and 99% sold at an ASP of S$1,191 psf.

Competitors were less aggressive. While we acknowledge that FCL’s bid could have been lower to secure the site, we do note that competitors were also less aggressive, judging from their bid prices and the relatively low number of bids. According to media reports, property consultants had expected a price of S$850 psf ppr (vs S$730 and below from the other bidders).

Key Risks
Overhang from potential vendor placement of shares to restore free float, to meet 12% float in DIS requirement. Current free float of FNN stands at 9.7%, below the mandatory 10% required by SGX. As part of the DIS and listing by way of introduction, the requirement is for a free float of at least 12% for FCL shares. FNN also has obtained an extension from SGX to restore its free float by 31 Dec 2013. As such, the market expects to see secondary share placements by the controlling shareholders. This could create an overhang and weigh on the share price in the ensuing period, should the placements be made at significant discounts to the market price.

Liquidity of shares post-DIS a double-edged sword. FNN used
to have an average daily trading volume of 2m shares prior to ThaiBev’s acquisition of the initial 22% stake from OCBC/ Great Eastern/ Lee Rubber. Post-GO, the volume has dwindled to just about 200k shares. With a low float, this could be a double-edged sword, particularly with potential company developments, and may undermine investors’ ability to initiate or liquidate their holdings.

Myanmar Brewery Limited arbitration will weigh on sentiment. While we think that MBL’s valuation is not a significant portion of our FNN TP, a perceived negative outcome, such as FNN being forced to sell its stake to its JV partner at a low valuation, may affect its share price. In addition, the arbitration could drag on for a while, and hence, it could continue to weigh on FNN’s share price in the intervening period.

Property market exposure and sentiment. We have valued FNN via the sum of parts, ie, F&B and P&P ops, together with FCL. At this stage, FCL still accounts for c.62% of our FNN’s TP. Hence, any adverse impact on the property market sentiments may affect FCL’s valuation, and in turn, FNN’s value (until the conclusion of the DIS). Shareholders of FNN will eventually become shareholders of FCL, and beyond the DIS exercise, any adverse impact on the property market will also affect their shareholdings.

Trim FY13F/14F forecasts by 2%/8%. We trimmed our FY13F/14F forecasts by 2%/8% largely due to adjustments in its overseas development property profit recognition. TP revised to S$6.50, implying c.20% return upside. With the proposed DIS and demerger, we continue to adopt the sumof- parts valuation. Our TP is adjusted to S$6.50, after applying a 30% property (FCL) RNAV discount. The lowered TP from S$9.52 is a result of the adjustment for the recent S$3.28/share cash capital distribution paid out to shareholders in July. At the current share price, and after adjusting for recent cash distributions and dividends, it is still trading at 6% below the General Offer price of S$9.55/share by TCC Assets, which closed earlier in Feb this year.

FNN, ex-FCL implied value at S$3.6bn or S$2.52/share. Based on our valuation methodology, we value FNN (ex. FCL) at S$3.6bn or S$2.52/share. This is based on the market values of the Group’s attributable shares in the listed entities – F&N Berhad, Vinamilk, Fung Choi, and applying 15x PE to its nonlisted F&B operations.

FCL implied TP at S$3.97, equals c.0.97x P/NAV. Our sum-ofparts valuation is S$3.97, after imputing a 30% discount to our RNAV of S$5.67/share (or S$8.2bn). This equates to c.0.97x P/NAV (proforma) after the proposed recapitalization of FCL to the tune of S$1bn. We believe a 30% discount to the property RNAV is fair, being the sector average. Current market price implies FCL at 47% RNAV discount, below sector average. FNN currently trades at S$5.53/share, implying a market capitalisation of S$7.97bn. Assuming our valuations of its F&B/ P&P operations are fair and stripping them out, it leaves a residual market value of S$4.3bn or S$3.01/FNN share for FCL at FNN’s current market price. That would imply that FCL is trading at a steep 47% discount to its RNAV and c.27% discount to its proforma NAV, which is below sector average. We believe this is unwarranted.

Source/Extract/Excerpts/来源/转贴/摘录: DBSV-Research,
Publish date: 20/09/13

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