Defensive Stocks Screwed – more after F&N & Carlsberg?



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Feb 21 2009
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One of the readers asked me about Genting Group’s (KLSE: GENTING, stock-code 3182) stock, a company I last wrote in June 2008 and since then I never look back. The stock was on free-fall back then and I presumed nobody dares to catch a falling knife. In fact when the group succeeded in its bidding for Singapore’s $5.2 billion Integrated-Resort project, investors had temporarily pulled their hand-brakes simply because the risk on the stock had increased many folds – the project will suck-up huge amount of money while the revenue would have to wait for some years. Hence why the rush for the shares? Genting is not a defensive stock and investors who bought the stock did so because they were in for long-term *like Warren Buffett, grin*.G13) is optimistic the Singapore project is on schedule for the grand opening by early 2010 but it is still at the mercy of the global recession. So for the time being, I’ll give the stock the pass.CARLSBG, stock-code 2836) and Fraser & Neave Holdings Berhad (KLSE: F&N, stock-code 3689). Surprisingly Carlsberg board decided not to declare a special dividend despite having cash reserve of RM227 million, up from RM217 million a year ago. Investors were furious that the company only maintained final dividend of 12.5 sen in 2008 (same as in 2007) without the normal special dividend. Without surplus payout (60% less from at least 35 sen) investors found little reason to hold on to their stocks and thus the sell-off. Carlsberg meanwhile justified that the company needs to preserve cash for investment and analysts believe the company may have set its eyes on company to acquire soon.KO, stock) decided not to extend its bottling and distribution agreements with F&N when they expired on Jan 26, 2010. Understandably F&N tried to tone down the latest development arguing that it won’t have any material impact for financial year ending 2009 but many thinks otherwise. Sales revenue of Coca-Cola Co products, mainly Coca-Cola and Sprite, amounted to RM421 million, or 35% of F&N’s soft drinks division’s revenue in FY08. F&N CEO Tan Ang Meng wasted no time after the news broke that it was a divorce after 73-year of marriage. Obviously Tan has taken great pain in explaining what the company will do to repair the havoc left by Coca-Cola’s pull-out.

However the problem with such huge project is the uncertainties in the overall cost especially the raw materials. Just like stock market either you’ve locked in cheaply or you were sucker for paying high price for the materials. Unfortunately there’s no crystal ball to tell and not even the late gambling tycoon Lim Goh Tong could predict the outcome of this game. And Genting’s latest announcement that Singapore’s theme park opening costs has increased and will erode earnings this year was enough to send the stock price lower. Genting International Plc (SIN:

Talk about defensive stocks – perhaps the most shocking news came from Carlsberg Brewery Malaysia Berhad (KLSE:

Carlsberg Stock ChartCarlsberg Dividend HistoryLong-term wise it makes perfect business sense to keep cash either for acquisition or just to maintain its business operation since it’s fourth quarter net profit for 2008 fell by 61% to RM9.6 million. While it’s true that Carlsberg is a defensive stock worsening global recession might push the business to the wall. Equally disappointed with Carlsberg’s latest earning result is Credit Suisse which released its new target price for Carlsberg at RM2.80 a share (from RM4.00 a share). As much as I like to see the stock price plunges to RM2.80 a share *drooling* the fact that the Denmark parent company Carlsberg Brewery A/S is holding the controlling 51% stake via UOBM Nominees (Asing) Sdn Bhd means it would be a while (if you’re lucky) before the shares are beaten to this level. But really, does Carlsberg Denmark needs to sacrifice its Malaysia cash for regional acquisition(s) – presumably there’s one in the pipeline?

F&N Stock ChartF&N Revenue 2004-2008F&N which has just celebrated its 125th birthday in Malaysia last year has another set of unexpected problem. Despite a 73-year old relationship since 1936 The Coca-Cola Company (NYSE:

While F&N can now claims freedom from restriction under agreement with Coca-Cola, in reality you need times to market and penetrate new market. Here you’re talking about replacing a branded Coca-Cola soft drink so the impact from the lost-sales will definitely be felt else why repetitive explanations? Heck, nowadays you can even find Coca-Cola Chicken Rice as part of the menu. Frankly speaking if F&N could substitute Coca-Cola with its own drinks (regardless whether it’s carbonated soft drinks, coffee, tea, isotonic, fruits or Tongkat-Ali) without major business impact then why chose to be at Coca-Cola’s mercy all this while? Surely it’s better to be in control rather than being controlled in your business expansion and growth, no? The relationship between Coca-Cola and F&N was said to be quite fragile with both can’t see eye to eye.

F&N Net Profit 2004-2008F&N EPS 2004-2008The giant Coca-Cola was said to be eager to bring in other beverages which would compete directly with F&N’s own products. Naturally F&N felt it was bullied as it can’t sell products that could compete with Coca-Cola but on the other hand Coca-Cola could do so. In short Coca-Cola was slowly pushing F&N to the wall and given such scenario both parties will eventually break-up, sooner or later. F&N has assured investors that its dividend policy remains unchanged but obviously it depends very much whether the company can narrow the $421 million revenue gap left by Coca-Cola. So should you rush to accumulate F&N shares? Again, it depends very much on your risk factor but I would like to wait and see. Considering the seriousness of the global recession which may has not peaked as we speak, I would like to stretch my buying power per share to the maximum.

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