Tuesday, 25 August 2015

F&N's Love-Hate Relationship with Children

Mention F&N and what comes to mind are its name sake beverages & 100Plus. But did you know the publishing of school textbooks, the very terror of our schooling years, is part of F&N’s business empire?  

Overview of F&N

With the spinning off of its property arm in 2014, F&N is now left with three business segments - beverage, dairies and publishing

Its Beverage business involves the sale of its name sake beverages and 100 plus. Its business is not just constrained to Singapore but is in many ASEAN nations. It has 55.8% stakes in F&N Malaysia Berhad. Its dairies segment consists of a license with Nestle Group to manufacture and distribute Nestle's food brands in ASEAN until 2027. In addition, F&N sells its own diaries brands such as F&N Milk and F&N teapot.

The last segment is its publishing arm which has exposure to Singapore, Australia and Hong Kong. Going by the name of "Marshall Cavendish", it is synonymous with the publishing of textbooks and workbooks used by most if not all schools in Singapore. It also publishes assessment books to "torment" students. As karma for “mentally torturing kids”, the publishing arm was recently in the red and is undergoing cost rationalisation to be profitable again.

Stability of F&N

Post demerger, the business F&N has been left with are generally “recession proof” because it involves selling drinks/dairies, textbooks and assessment books. Everyone needs to drink and study!

In addition, the demerger has left F&N with a stable business which generates free cash flow. In its latest 3Q report, F&N was able to generate a free cash flow of s$100 million over the past 9 months, which is enough to cover its full year dividends of 5 cents and payment to non-controlling interest. Furthermore, with a net cash position of $209 Million (meaning it has more cash than debts) and lowly geared balance sheet, one can reasonably expect dividends in the region of 5 cents.

Recently, F&N sold its stake in Myanmar Brewery for s$780 million. While no special dividend will be given, the company mentions they are seeking acquisitions with the proceeds.           

F&N’s future

Unfortunately for growth investors, F&N is unlikely to be a growth stock that will experience large earnings growth. F&N was forced to sell Myanmar Brewery, a star grower among its brands; hence the only growth is likely to come from the turnaround of its publishing arm and favourable exchange rates. However, F&N has announced it is eyeing acquisitions with the sales proceeds of Myanmar Brewery. Hopefully this will boost its earnings.

To me, I will classify F&N as a slow grower company where revenue/profit growth will be in its low single digits. We can reasonably expect F&N to continue paying dividends in the region of 5 cents due to i) its businesses’ ability to generate consistent free cash flow, ii) resilient business, iii) strong balance sheet and iv) s$780 million proceeds from Myanmar Brewery’s sale.


While investing in F&N will not be the talk of the party (but definitely in the classroom), its strong balance sheet, recession proof businesses and potential long term earning growth from acquisitions makes F&N a good consideration for income investors.

So next time when you see your child reads his textbook, think F&N!

<Neither vested nor suffered a traumatized childhood from textbooks>

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