F&N to face pressure from rising sugar prices

PETALING JAYA: Fraser and Neave Bhd (F&N) is expected to face added pressures from increasing sugar prices coupled with the possibility of sugar “sin tax” implementation this year, according to TA Securities.

The research house foresees global soft prices for commodities, including sugar, escalating due to unfavourable weather, causing output to fall behind demand.

Worth noting is that the sugar price has resumed its uptrend since December 2016 and is currently trading at around 20.6 US cents/lb, which is 13.2% higher than the average of 18.2 cents/lb in 2016.

However, TA Securities said, F&N will be able to pass on the cost pressure to consumers by increasing its soft drink prices, and thus it is not expected to see a sharp contraction in soft drinks profit margin in 2017.

As for the sugar “sin tax”, F&N’s management believes it will be implemented eventually in Malaysia and the company is cautious on its impact on earnings.

To mitigate the impact, the management has always been working on reducing the sugar index level of its beverages. F&N’s sugar index level has been decreasing at an average rate of 2.6% year-on-year in the last 10 years, which could lessen the negative impact arising from the “sin tax”.

TA Securities expects food and beverage companies to increase product prices more than the sin tax cost to buffer the drop in sales volume in order to keep margins constant.

Meanwhile, F&N’s management said it is already compliant with the Price Control and Anti-Profiteering Act Regulations 2016, whereby there will be no mark-up in margins of products sold for FY17.

However, considering the rise in sugar price and the consequent increase in production costs, prices of selected F&N products have been adjusted higher for FY17 to protect its profit margins.

TA Securities is maintaining a “sell” call on F&N as the valuation is running ahead of company’s fundamentals, with a lower target price of RM21.63.