Halal Industry

Malaysia’s sugar tax implementation a negative development for F&N Holdings - RAM Ratings

| 09 November, 2018
 BERNAMA

NOVEMBER 9, 2018 | 4:56PM MYT | KUALA LUMPUR

The recently announced excise duty on sweetened beverages will likely post a challenge to Fraser & Neave Holdings Bhd’s (F&N Holdings) soft-drinks operations, which contribute almost 30 per cent of the group’s revenue, says RAM Ratings.

However, RAM Ratings said this would not have an immediate impact on the group’s ratings.

Effective April 1 next year, a 40 sen tax per litre would be imposed on drinks containing more than five grams of sugar or sugar-based sweetener per 100 ml, as well as fruit and vegetable juices with sugar content of more than 12 grams per 100 ml.

In a statement, the ratings agency said the razor-thin operating margins of F&N Holdings’ soft-drinks business would leave little room for it to absorb cost increases without affecting its profitability. therefore, it expects the heftier costs to be mostly passed on to consumers through higher product prices.

“If the sugar tax is fully passed on, the selling prices of the group’s key beverage products are estimated to rise between 10 sen and 60 sen.

“Despite the fairly minimal quantum of price increases, we expect demand to be negatively affected in the near-term amid consumers’ knee-jerk reaction,” it said.

Over the longer term, RAM Ratings expects the growth of the ready-to-drink market to stay subdued and largely driven by sales of bottled water, in line with consumers’ increasing health awareness.

Nevertheless, it expects F&N Holdings’ dairy operations in Malaysia and Thailand would anchor the group’s performance, as was the case in fiscal 2017 and 2018.

“Even with a further weakening of its soft-drinks business, we envisage the group’s balance sheet and cashflow-protection metrics to remain strong, with a net-cash position and a funds from operations debt cover of close to one time,” RAM Ratings said.

Copyright New Straits Times

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