Poor earnings, high debts and an increasingly competitive soft-drinks market are expected to take the fizz out of Fraser & Neave Holdings Bhd (F&N)“s impending replacement and new warrants, analysts …
Poor earnings, high debts and an increasingly competitive soft-drinks market are expected to take the fizz out of Fraser & Neave Holdings Bhd (F&N)“s impending replacement and new warrants, analysts say. The share price of the soft drinks maker, historically liked for its strong management team and resilient business, is likely to remain bottled up in the medium term and underperform the market. Factors dampening its share-price performance include the company“s recent acquisition of Kuala Lumpur Glass Manufacturers Company Sdn Bhd (KL Glass) from Nylex (M) Bhd and the pricing of the warrants, says Vincent Khoo of SG Securities. Although KL Glass would add value to the company, “investors are unlikely to re-rate F&N“s shares significantly (despite improved core operations) until a clear turnaround in KL Glass“ profits,” he adds. F&N received the go-ahead for its rights and warrants issue last December. It will offer rights to 123.62 million new F&N shares of RM 1.00 each, with up to 49.45 million detachable warrants (2000/2001) at RM 2.29 per share on a basis of one for five. It will also offer swap warrants (2000/2001) to existing warrantholders for a cash payment of 20 sen. The warrants will have an unchanged tenure, expiring on February 20, 2001, and a strike price of RM 3.28. Still, some analysts say the new strike price and rights issue may not be attractive enough to entice investors. The warrants, which ended recently at 79 sen, carry an exercise price of RM 8.50 and are trading a wide conversion premium of 132.25% to the mother share which closed at RM 4.00. The securities will go ex-dividend on March 1, 2000, with the last date of lodgement being March 7, 2000. With the new exercise price, the warrant, which is worth 36 sen according to the Black Scholes valuation (at a mother-share price of RM 4), is still expensive, says Phua Kwee Hock, TA Securities“ technical analyst. “With the exercise price of RM 3.28, the warrant is 15 sen in-the-money, but it will only have about 10 months“ of life left, which is an extremely short time, or 21 sen of time value by Black Scholes“ valuation,” Phua explains. This excludes the 20 sen cost of converting the old warrant for new. “The company is betting on an extremely bullish share market,” he says. “Assuming the market performs extremely well, this whole structure appears okay.” Still, he recommends that warrant holders take profit. Other analysts see the swap warrants as an opportunity for warrant holders to recoup some, if not all, of their investments. The company would still have to battle to regain its financial health. It reported a loss of RM 60,809 in the financial year ended September 30, 1999, from a small profit of RM 5,133 in financial year (FY) 1998. This translates to a loss per share of 35 sen in FY99 and an earnings per share (EPS) of 3 sen in FY98. “It“s a well-run company, just that they got caught at a really bad time,” comments Steven Tan, Ke-Zan Securities“ analyst who covers the consumer sector. Losses were seen in F&N“s main earnings driver, its soft-drinks operation. The depreciation of the ringgit drove up the cost of concentrates the main raw material in its drinks and thus brought margins crashing down, analysts explain. Poor economic conditions meant that the company was unable to pass the rise in costs to the consumer. Apart from the fall in demand, there was also a price war in the soft-drinks industry, which the company also had to fight in to maintain its market share. “Everything that could go wrong went wrong. They had to compromise on margins, and spend on promotions and trade discounts, so that they wouldn“t be left behind,” Tan elaborates. Other than the spiralling cost of raw materials, Tan cites the company“s aggressive expansion plans last year as one of the main causes of its sharp fall in profits (which surpassed the RM 50 million-mark in FY97). F&N“s recent decision to acquire KL Glass has also drawn mixed reactions from analysts. KL Glass will be a synergistic addition to its stable of companies giving it an estimated 90% market share in the bottling business, but having another business to nurse to health may prove to be a distraction for F&N“s management. KL Glass, which was acquired for RM 60 million cash, made a profit of RM 2.4 million in FY ended December 31, 1998, but brought with it RM 25 million in loans. SG“s Khoo estimates F&N“s gearing at 114%. Still, F&N“s operations would be much leaner with its ongoing rationalisation process, and improving economic conditions should also help plump up F&N“s profit margins and add more value to the its well-known Coca Cola franchise. Looking ahead its glass operations are also expected to be a direct proxy to a recovering food-and-beverage sector. Barra Global Estimates“ poll of eight stockbroking houses this month yielded a profit forecast of RM 14.1 million in FY2000 and RM 33.7 million in FY2001. SG has a target price of RM 4.20 for F&N, but adds that the company is not a “buy” as there is little upside to its share price. Although F&N may be an alternative exposure to its parent company, Fraser & Neave Ltd, Singapore (the major shareholder with a 55.17% stake), its shares are tightly held, with a free float of 8.39%. They also carry a low beta of 0.56 versus the Kuala Lumpur Composite Index. This indicates that its share price is not volatile. “The story is not quite sexy enough for people to buy it,” says Ke-Zan“s Tan.