F&N 6 Years On - Part 2

The is a continuation of the previous post.

We discussed how F&N had become a diary powerhouse in ASEAN (Association of South East Asian Nations) and the crown jewel is actually its 19% stake in Vinamilk which now accounts for 47% of its earnings. So what is Vinamilk? Well, Vinamilk is the largest diary company in Vietnam with 50% market share across the different diary products. It is also the largest listed company in Vietnam at S$17bn market cap!

F&N, at S$3.7bn market cap, implies that its stake in Vinamilk pretty much explains for its entire existence and the rest of its businesses and brands (100 Plus, Magnolia, King's ice cream) pretty much worth nothing. Albeit, the hype in Vietnam is causing every stock starting with Vina or Vin or Viet to rally hard, so it might not reflect the true intrinsic value of F&N's stake.

Nevertheless, let's take a brief look at Vinamilk. 

Vinamilk's Spokesperson

Vinamilk is helmed by helmed by Ms Mai Kieu Lien who was the spokesperson for the brand from 1995 to 2018 (pic above). She led the firm to dominance with provocative ads that flooded the internet deploring the nutrition benefits of milk to the 90 million Vietnamese. She is still single.

Just kidding.

The following is an abbreviated CV for Ms Mai (the real one), one of the most prominent businesswomen in Vietnam.

Born on 1st Sept 1953 in Paris, France
1976 to 1982: She was a Technology Engineer
1982 to 1983: She was Vice Technical Director
1983 to 1984: Studied at Leningrad Institute of Engineering and Economics
1984-1992: Deputy Chief Executive Officer in charge of sales
1992-Present: CEO of Vinamilk

She was also a member of the Central Committee of the Vietnamese Communist Party. In her 26 years as CEO, she led the firm to become the dominant market leader with 13 production plants, 10 product categories and 15,000 cows selling USD 2.2bn of diary products annually and generating USD 500m in profits and 400m in free cashflow. Most of these metrics will continue to grow at 20-30% for the next few years. Vinamilk has 40-80% market share in various products. Over the last 20 years this formidable lady trashed Dutch Lady, the UHT milk brand of South East Asia, including Singapore. Dutch Lady is now the distant #2 with a mere 20% market share in Vietnam. Here's her real pic below.

Mai Kieu Lien, not your normal Ah Lian, don't pray pray

With F&N owning almost 20% of Vinamilk with a legendary dragon lady running the show, it could be part of the reason why the stock market bidded up F&N from S$1.80 in 2015 all the way to $2.60 today. But there is another reason for the stock to go up. This has to do with the Elephant - Thai Beverage.

Recall that Thai Beverage took over the whole F&N during the saga of 2012 which included the property arm. Now, Thai Beverage had also pretty much did six years of thumb-sucking (ie not doing anything) and left a lot of stuff hanging for that period of time. Hence, it is rumoured that the whole

reorganization of Thai Beverage Group might be due. (Well to be fair, they were pretty busy with beating up Singha - the Lion in their home market.)

So here's how the organization might work. There is an ultimate parent entity called TCC which owns 59% of F&N, 59% of Fraser Centrepoint. Meanwhile Thai Beverage owns another 28% of Fraser Centrepoint. So the idea was for Thai Beverage to trade its 28% stake in Fraser Centrepoint for TCC's stake in F&N.

This would allow Thai Beverage to own around 60-70% of F&N (dependent on the transacted price) and consolidate its earnings. It would hopefully also speed up integration between Thai Beverage and F&N allowing synergies to be reaped. All in, this could mean a S$30-40m improvement in EBIT, together with additional valuation increase, we are talking about a S$500-600m increase in market cap and as Vinamilk continues to grow 15-20%, that adds another S$500-600m of market cap to F&N every year.

F&N 5 year share price chart

Not forgetting if F&N could turn the other loss-making stuff (like publishing) back into positive territory, we would get an additional S$10-20m in EBIT. So, just estimating F&N's full upside potential,  it should be at least 1.2 billion dollars from today's market cap. That's more than 30% upside. Of course, these are just numbers in the air, I haven't done the detailed work. On first cut, things definitely looks interesting. To sum up:

1. F&N has a solid ASEAN diary business generating c.$90m going to S$100m EBIT if it turn its loss-making segments positive.

2. Its stake in Vinamilk is worth almost its whole market cap, implying that the market is not ascribing value to its existing businesses mentioned above.

3. A reorganization of the Thai Beverage Group could bring about more synergies allowing for a high market cap, all in, we could see market cap increase by S$1.2bn which is a c.30% upside.

So, time to take closer look!

This author does not own F&N yet!

F&N 6 Years On - Part 1

6 years ago, we discussed Fraser & Neave (F&N)'s fate in a tongue-in-cheek Battle of the Animals post. As per our short term attention span in today's world, we left it hanging, without an update, for six long years. Well, today is the day. We shall stop our sucking thumbs! We shall follow up with the long await instalment to our own saga and analyze things clearly. 

To recap, the saga came about as the Elephant in the ASEAN (Association of Southeast Asian Nations) room charged into our tiny red dot to try to grab Tiger, F&N's baby - Asia Pacific Breweries. In the end, Star Player - Heineken, refusing to give up its control on this profitable joint venture that brewed various beer brands: Tiger Beer, Anchor and ABC stout, swallowed the whole alcohol business i.e. Asian Pacific Breweries expensively. Thai Beverage, the elephant, then took control of F&N, the parent of Asian Pacific Breweries, or rather, the portion left after the Star took out Tiger. 

Our Tiger Girl: Jessica Alba

We also speculated what would happen to Chairman Lee Hsien Yang and Tiger Girl: Jessica Alba. In the end, Hsien Yang had no choice but to relinquish the Chairman role to Charoen (Thai Beverage boss), a precursor to his subsequent fate in the Battle for Oxley Road. Unfortunately, he lost on both counts. But he still had various prominent roles including the Chairman of CAAS, President of Insead Singapore and Chairman of the Islamic Bank of Asia amongst others which he would probably be leading using Jedi force projection outside Singapore! Meanwhile, Jessica Alba, unfortunately moved on and launched her own company - The Honest Company, with milk products competing with F&N's Magnolia. Alcohol and honesty don't mix well I guess.

So what's F&N today? After Tiger Beer was taken, the portions left were non-alcoholic beverages, dairies, publishing and property. Subsequently, property was spun off into a separate entity Fraser Centrepoint while the F&N today is left with the remaining three business segments. With more clarity today, we can now see better what are the key drivers for this beloved Singapore brand. The charts below shows F&N's breakdown by revenue as well as by profit in 2017.

F&N revenue split

We can see that F&N is roughly 60% dairies by products and 60% Thailand and Malaysia by region. The beverage business and the publishing business are actually small in the big scheme of things. Despite 100 Plus being such a big brand name, it doesn't really punch its weight in terms of revenue and as we shall see later, in profits too. Also, Singapore is only a mere 25%. The more important markets are in Indochina. The earnings split below is even more telling.

F&N EBIT split

For me, this chart was kind of a surprise! F&N makes all of its earnings from diary products. The beverages, publishing and other businesses are all loss-making. What's more, when we see EBIT (earnings before interest and taxes) contribution by country, Thailand, Malaysia and Vietnam makes the money and Singapore is loss-making. Vietnam is 47% of total EBIT! F&N is a Vietnam play! 

When I first thought about this, I couldn't recall what are F&N's dairy products and what kind of businesses it had in Vietnam. Only with further digging then things came to light. F&N's diary products are Carnation and Magnolia, household products in South East Asia. Carnation is the leading condensed milk brand in Malaysia and Thailand. Building on that the firm had built a strong business selling all kinds of dairy products with local popularity. The cherry on top is F&N's ice-cream business. It has three brands: King's, Magnolia and Meadow Gold. These were my childhood ice-cream brands!

While Singapore has since moved on from F&N's ice cream brands for higher end treats like Magnum and Haagen Daaz, I believe these brands are still doing well in other parts of ASEAN and hence delivering the dough for Charoen. The diaries segment in Malaysia and Thailand earns c.S$45m and c.S$73m pretax profits last year. As for Vietnam: this is actually equity accounted profits because F&N bought its stake in Vinamilk up to 19%, making it the largest foreign shareholder in the firm. 

Dairy business in detail!

The chart above from the firm provided detailed breakdowns of the different parts in its diary segment which was super helpful. We can see that the Malaysia and Thailand have healthy 12-15% EBIT margins over the last two years. With the additional of Vinamilk, F&N becomes a powerhouse in diary in ASEAN that could dream about becoming a Danone or Meiji someday!

Alas the stock is not cheap trading at 24x forward PE  and 12-13x forward EBITDA. On the free cashflow matrix, it is earning c.S$70-140m which translates to a 2-4% free cashflow yield based on its market cap of S$3.8bn. That's not really cheap by Singapore's standard where other names are doing 5-6%. Overseas Education is doing 9% FCF yield! (albeit it's small cap.) But wait, there are other things going for F&N. The Lion shall rise again!

Next post we shall discuss Vinamilk and the reorg with Thai Beverage!

Starring: Crouching Tiger, Elephant and Giraffe

Once in a while, we have a huge corporate saga that really deserves a book. But that's gonna take years to write. So meanwhile, I write what I can. Most avid investors in Singapore would have guessed what's this about. Well, we are going to discuss F&N, APB and Tiger Beer, Thai Beverage with Chang Beer, Heineken and Kirin Holdings of Japan.

The formal introduction of the players:

Star: Heineken
Tiger: F&N and Asia Pacific Breweries
Elephant: Thai Beverage and Chang Beer
Giraffe: Kirin Holdings

The story:

Once upon a time, there was a Tiger, an Elephant, a Giraffe and a Star. The Tiger and the Star were a couple for a long time. But one fine day, the Giraffe pronounced its love for the Tiger. So did the Elephant next day! And the Star got mad!

Ok let's get serious.

In 1884, John Fraser and David Neave founded F&N. Geez, that was the era when the East India Company fought the Pirates of the Caribbean and Chinese in Singapore then had pigtails! Anyways, nothing much happen then until 1931 when F&N decided to form a JV with Heineken to make Tiger Beer. That's the beginning of Asia Pacific Breweries and over the years, Tiger grew to be the biggest brewery in this part of the world (S.E.Asia) with 120 beer brands (and we only know Tiger right?), 30 breweries in 12 countries. It usually has the No.1 or 2 position in most countries and it makes a huge amount of money for its parents.

So it's naturally that APB got listed, with 20% free float and roughly 40% stake with each of its parent: Heineken and F&N.

Meanwhile, F&N grew to become a non-alcoholic drinks maker, a publisher and a giant property developer. It's best brands are well-loved in Singapore, such as 100 Plus, Seasons Lemon Tea, Ice Mountain, Times Bookstore, Fraser Suites and Centrepoint etc. Temasek had a stake. Our banks as well.

In 2010, the giraffe from Japan came. Kirin bought over Temasek's 15% stake for SGD 1.3bn. Paid a huge price for it. Temasek was happy selling out back then. Little did they know that that stake is now worth *gasp* 2bn today! They left 700 million on the table! Ok that's not fair lah, back then it was sold at a huge premium. The Japanese like to overpay.

Kirin wanted to beef up its overseas beverage business. It had San Miguel of Philippines for beer. It had Lion Nathan in Australia for diary products. It wanted F&N to fill in the gap. But 2 years passed, nothing much was achieved. Kirin had some good products like Afternoon Tea and Fire Coffee, but it was never distributed via F&N.

Fast forward to today, the elephant charged into the room. Thai Beverage, brewer of Chang Beer and alcoholic spirites like Mekhong and Sang Som rum, stormed in and bought 22% stake from the OCBC group effectively making it the biggest shareholder of F&N. Back in Thailand, the beer market is one big Zoo with the elephant actually getting bullied by the Lion (Singha), by Tiger, even the giraffe and other smaller animals. But it has a dominant share in white and brown spirites, with some brands even having 200 year history one. That's like when Thailand was called Siam and their Kings were busy building temples to rival Angkok Wat. That's some 80 years before F&N's founding in 1884! Really once upon a time one.

Anyways, with 2 foreign entities owning 37% of the F&N, Heineken of Holland panicked. Maybe they might do something with its baby: Asia Pacific Breweries. And so the Star decided to jump in with an offer to buy out APB, the subsidiary of F&N and Heineken, at SGD 5.1bn dollars. This throws a huge spanner into the gears as F&N without APB would become a small drinks business and a property play, which both Thai Bev and Kirin wouldn't be quite interested in. So now tonnes of questions are being asked.

What will happen to our beloved Tiger Beer brand?
Will F&N breakup?
What will the elephant and giraffe do?
Did Temasek and OCBC just sold out too cheaply?
What about Chairman Lee Hsien Yang?
He just became Chairman not too long ago, if no more F&N then where can he go?
Why did Heineken pay so much? What is it that they see in Tiger?
And Jessica Alba, our Tiger Girl, will she jump ship?

So many questions! Ending the post here would be a perfect cliffhanger. But then really quite zek ark (disgusting) with not much value add to serious readers. So let me attempt some forensic analysis.

Now APB has an EBITDA of S$700m last year and probably closer to S$900m this year. Considering the synergies Heineken can extract, which should be at around 20%, we are seeing EBITDA of S$1.1bn in 1 or 2 years. Considering the growth profile of APB, it might be reasonable to pay up to 12x EBITDA for this. Well, AB Inbev, the world's largest beer co. did pay 16x for Modelo recently. So this means that Heineken will be willing to pay up to S$13.2bn for the whole APB, or S$5.3bn for F&N's 40% (APB has no debt, if it had, the calculation will need to factor that). This means that there is probably some juice left to squeeze out of Heineken, if Chairman Lee Hsien Yang agrees with the math and leads the board to arm-twist Heineken. But not much more, remember the first offer is already S$5.1bn.

Meanwhile, Heineken blinked and extended the deadline, which was supposed to be yesterday (27 July Fri).

What about the elephant and the giraffe? Well they can't complain much since they benefitted with Heineken doing this stunt and F&N just went through the roof from recent $6+ to now closer to $9. Meanwhile, it might not be unthinkable that either of them, or both of them are scrambling to buy more F&N in the open market to get to 30% stake or more such that they have a bigger say in the eventual breakup. Which explains F&N going from strength to strength.

Now, Kirin is very interested in the drinks business and the Japanese has a history of really overpaying, especially so with the current strong yen. It might bid high for the drinks part. So will Chang Beer say OK to a good price? But then they will be left holding with a property business and cash that was sput out along the way. How does that tie in with their Thailand business? Hmmm, these are questions for Part 2, more thinking is needed.

But what's the real strategy to make money here? Sadly, there isn't any great ones. Things are playing out too fast. APB is ABOVE Heineken's offer price which means the market is saying F&N will ask for more. And F&N itself is all time high driven by more buying in anticipation of more bids for its other businesses. Chang Beer didn't really do anything after the news broke but it did rally beforehand. And so did Heineken. Meanwhile Kirin is stuck in submerging Japan, so not so interesting.

Maybe the moral of the story here is to keep looking at consumer staples names. Over the long run, they have proven to be great investments most of the time. The first ever stock discussion on this blog: Colgate, is up a crazy 60% including dividends in less than 2 years!

We shall discuss the other questions and further updates as the saga unfolds.