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MONDAY MULTIPLE

Five stocks of the fascinating sixth letter

These SGX-listed companies play into ongoing themes like food, electronics and property
Monday, April 17, 2017 - 05:50

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DON'T giggle. A number of intriguing stocks I own or track on the Singapore Exchange (SGX), for some reason, begin with the letter "F".

Fine. Investing by alphabet is not the wisest of ideas. Call it frivolous. Foolish, even. But here's a fair shot at faint fortune, anyway. After all, these counters play into ongoing themes like food, electronics, and property.

F&N

One grand old stock hanging around is Fraser & Neave, or F&N.

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Founded in 1883, F&N today flaunts a cool half a billion dollars of revenue every quarter, from brands like Carnation canned milk (licensed from Nestle), Teapot creamer, Magnolia fresh milk, and the 100Plus isotonic sports drink.

Around the region, its Thai dairies segment is a star. F&N is also steadily increasing its stake in Vinamilk, Vietnam's dominant milk player.

The only problem is how it is trading at over 30 times historical earnings. No matter how sexy the growth potential of a defensive consumer staples stock, the higher the expectations for the stock, the more that can go wrong.

Margins can get squeezed by an unexpected rise in input costs. Industry valuations can take a beating should other parts of the global economy look more attractive.

Food Empire

Another fascinating food stock is Food Empire, a dominant instant coffee mix player in Russia, Ukraine and Kazakhstan.

The group is recovering from the dramatic fluctuations in the Russian and Ukrainian currencies in the last few years, even as it recorded higher revenue in local currency terms.

Indochina sales have also grown impressively. A more diversified revenue stream from emerging economies like Vietnam and Myanmar will make the stock less risky, boosting valuations. In Vietnam, though, success depends on how much market share its instant coffee products can snatch from incumbents like Trung Nguyen, Vinacafe, and Nescafe.

Frencken

If food doesn't fit your fancy, fret not. There's a global manufacturing boom going on.

A stock I nibbled on at the beginning of the year was Frencken, a precision engineering firm that makes complex equipment like X-ray machines, electron microscopes and pharmaceutical packaging machines.

Significant revenue streams come from customers in The Netherlands, China, Singapore, Malaysia, Hungary and the Czech Republic.

Frencken also has plastic injection businesses, which make modules for cars among other things.

What seemed to have sparked a rally was how the firm said in January that it will sell a loss-making major business, Precico Group Sdn Bhd, to a customer, a subsidiary of automotive supplier giant Valeo.

The consideration is S$43 million minus net debt. Hopefully, the cash can be put to good use, or returned to shareholders.

Fu Yu

No, it's not a swear word, but another plastic injection moulder I bought a bit of this year.

Fu Yu supplies to the IT, telco, car, medical, electronics and electrical appliance industries. A major customer is understood to be Hewlett-Packard, and Fu Yu makes printer casings for the group.

Other than multinational customers, Fu Yu can also take outsourced work from contract manufacturing giants like Venture and Flextronics. A key subsidiary is Malaysia-listed plastic components maker LCTH.

Fu Yu has been suffering declining revenues amid consolidation in its industry. Its margins are slightly better than Frencken's. What is also impressive is its ability to squeeze out cash from a declining business.

No surprise, then, that the stock has steadily risen through the years.

The contract manufacturing business is notoriously cyclical, however. Investors with longer memories will recall how Fu Yu used to be very hotly promoted, with devastating consequences once the enthusiasm and earnings faded.

Amid talk of takeovers in the industry, it was actually its competitor Fischer Tech (oh look, another "F"!) that got in on the action first.

Fischer said earlier this month that it has "received a non-binding expression of interest from a third party relating to a possible transaction involving the shares of the company".

How do you value the potential of companies like Frencken, Fu Yu and Fischer in an unpredictable global economic cycle? When can you make a reasonable judgement that stock prices are way ahead of themselves?

This is something I'm still trying to figure out. For Fu Yu, I'm comforted by its cash hoard of over S$100 million. For Frencken, I like its European customer base giving some diversification, along with its consistently profitable mechatronics operations.

Expectations are now high that earnings will recover in the coming year. More importantly, investors should look out for whether new revenue streams can be developed.

Frasers Centrepoint Trust

Finally, Frasers Centrepoint Trust (FCT), a real estate investment trust (Reit) I've been holding for years, has been a rewarding find.

FCT owns many key malls in Singapore's North, two main ones being Causeway Point in Woodlands and Northpoint in Yishun.

In the populous heartland North, there are not that many spaces for competing malls to spring up, even as new flats continue to be built in Sembawang, Woodlands and Yishun.

Even in a soft economy, the two malls have been able to continue raising rents on tenants, which means the tenants aren't doing too badly either.

Given that the malls cater to a mainly residential population, FCT has a more defensive nature compared to other Reits-owning malls in town like CapitaLand Mall Trust, Starhill Global, or Mapletree Commercial Trust.

And since Yishun and Woodlands are far away from everything else except each other and Malaysia, the malls should remain a convenient, air-conditioned place for residents to walk around.

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