iCapital and F & N

Ever since F & N announced Coca-Cola will not renew their contract by 2010, F & N shed about 13% of its market capitalization. Whether that's justifiable or not, it has surely created short term uncertainty.

Fraser & Neave Holdings Bhd (F&N) remains confident of its future and expects to recoup its revenue loss from the termination of the Coca-Cola franchise business by launching more new products and venturing into export markets.

Group chief executive officer Tan Ang Meng views the termination of the franchise agreements as a short-term setback and sees vast opportunities for the food and beverage group as it is no longer restrained by the terms and conditions stipulated in the agreements.

Under the franchise agreements with Coca-Cola, F&N is unable to launch tea, coffee, water and energy drinks, export its own brands and open new manufacturing plants among others.

“We now have a whole new chapter open to us with the restrictions gone. With our financial strength and the diversity of our product mix, we are positive about our future,” he tells StarBizWeek in a telephone interview.

In a filing with Bursa Malaysia on Wednesday, F&N said Coca-Cola Co was not extending the bottling and distribution agreements with F&N when they expired on Jan 26, 2010.

Sales revenue of Coca-Cola Co products, mainly Coca-Cola and Sprite, amounted to RM421mil, or 35% of F&N’s soft drinks division’s revenue in FY08.

Tan says F&N will lose some 15 million cartons of drinks sales per year after the agreement expires, but one third would be mitigated by exports of 100Plus, Seasons and F&N drinks to Singapore. F&N’s agreement with Coca-Cola for the latter to produce and package 100Plus, Seasons and F&N drinks in Singapore will be terminated as well.

The management came out to clarify that they can replace those revenue and earning from Coca-Cola.

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Looking at their product mix in 1999 and 2008, I believe the management has credible claims they can find new sources of growth.

Since F & N contributed to about 8-9% of iCapital NAV[based on 2008 Annual report], is this a big concern? First, iCapital has changed it rating to hold in their newsletter. At least we know they will not increase more weightage. We must not assume that they are whole bunch of idiots and do nothing, they could even lighten up their holdings.

Secondly, worst case scenario, assuming F & N shed another 20% more market capitalization, estimated impact to iCapital NAV will be around 2-3%. Based on their 18 Feb 09 NAV of $ 1.55, we may take off another 0.05/share in the worst case scenario. iCapital will still pretty much selling at a discount based on the latest price of $ 1.43.

F & N losing its contract is unfortunate but it is not the end of the world.