Fraser and Neave bids its cash cow goodbye after losing battle for Myanmar Brewery

MBL accounts for 30% of F&N’s earnings.

Arbitrators have neatly knocked the last jewel off Fraser and Neave’s crown. After a grueling battle for the rights to buy over F&N’s 55% stake in Myanmar Brewery, arbitrators have finally ruled in favor of Myanmar Economic Holdings (MEHL), F&N’s erstwhile beer partner.

Myanmar Brewery has an 80% market share in Myanmar’s beer market. CIMB estimates that it accounts for around 30% of F&N’s earnings, and the loss of Myanmar Brewery will be a huge setback for F&N.

“The ruling in favour of MEHL is clearly a big negative for F&N as its last crown jewel is taken out, leaving the group with a big earnings hole to fill, even if it is eventually paid fairly for its 55%-stake. The current risk is that the fair price assessment might still short-change F&N,” noted CIMB.

Here’s more from CIMB:

Myanmar Beer’s contribution to F&N’s FY13 profit was 20-25% of the group total. It is also the fastest-growing part of F&N, with EBIT +44% yoy in 9MFY14 while the other parts are growing at the low-single digits. 3QFY14 beer EBIT alone grew 74% yoy.

We estimate that MBL contributes 30% of F&N’s FY14 profit and as growth sustains, MBL could account for as much as 36% of F&N’s profits in FY15. 

We have made estimates of F&N’s earnings breakdown between Myanmar and ex-Myanmar. Assuming that investors are paying F&N Bhd valuation multiples (22x) on the ex-Myanmar earnings, the current share price of S$3.15 implies that investors are valuing the MBL stake at 25.4x FY15 P/E, or S$1.82bn. 

MBL is a consumer staple enjoying a monopolistic position in a high-growth market. The highest multiples on listed alcohol companies is 30x P/E. APB was taken out at 35x P/E. If MBL was listed, it would be trading at 30-35x P/E.