Fraser & Neave's profits under pressure on costlier raw materials

Income margins could slow down to 5.4% next year from 6.5%.

While Fraser & Neave (FNN)'s EBIT margins have improved significantly over the past few quarters benefitting from subdued raw material prices, DBS Vickers Securities believes that the expansion could have or near its peak with input prices on the rise, in particular sugar.

"We expect margins to moderate going forward," it said.

Due to absence of one-off gains, FNN's FY16 headline net profit slumped 83% y-o-y to S$108m. However, core recurring profits grew strongly by 73%, excluding the contribution from discontinued operations (FY15).

The growth was driven mainly by margin expansion of its Dairies (+480bps) from last year due to effects of lower raw material input prices.

"We believe margins should have peaked; and, going into FY17F, we expect them to moderate as raw material prices have progressively crept up. We are projecting EBIT margins to soften to 5.4% in FY17F, from 6.5% in FY16. We trimmed our forecasts by 4%," it said.

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