F&N Malaysia to milk upstream dairy activity from RM156m land purchase

Singapore

MAINBOARD-LISTED beverage company Fraser & Neave's subsidiary Fraser & Neave Bhd (F&NHB) is acquiring land in Malaysia for integrated dairy farming and milk production.

F&NHB unit F&N AgriValley Sdn Bhd has entered into a conditional sale and purchase agreement to buy about 4,454 hectares of leasehold land in Mukim Chuping in Perlis for RM156 million (S$51.1 million), Bursa Malaysia-listed F&NHB said on Oct 8.

The seller is MSM Perlis Sdn Bhd, a unit of refined sugar producer MSM Malaysia Holdings Berhad. The land, Ladang Chuping, is currently a palm oil, rubber, and mango plantation.

The acquisition "is to explore the upstream insourcing of fresh milk to support existing downstream production and distribution of fresh milk products", said F&NHB.

F&NHB chief executive officer Lim Yew Hoe said this would allow the firm to be less dependent on imported milk, while promoting local agriculture. "A vertically integrated farm producing locally grown crops in-situ to feed the cows reduces carbon footprint, in addition to lowering the value chain cost per litre of fresh milk," he added.

The purchase price for the remaining lease rights of between 42 to 53 years was arrived at on a willing-buyer willing-seller basis after taking into account an independent market valuation.

The deal will be funded via internal funds and/or external borrowings, with the exact funding mix to be decided at a later stage after taking into consideration F&NHB's gearing, interest costs, and internal cash requirements.

Of the purchase price, RM25,000 was paid on Feb 28 as an earnest deposit, while RM15.57 million was paid upon the execution of the agreement. The remaining 90 per cent of the purchase price shall be paid within three months from the date that the agreement becomes conditional. This balance payment may be delayed if the state of the land is inconsistent with its state on Sept 26, when F&N AgriValley inspected it.

The deal is expected to be completed in the second quarter of 2020.

On Friday, F&NHB gave further details of the proposed acquisition. As of Oct 11, F&N AgriValley "is still evaluating various investment options to put on stream the upstream fresh milk business", it said.

The net book value of Ladang Chuping, including rubber, oil palm, and mango trees, is RM157.38 million based on MSM Holdings' audited accounts for the financial year ended Dec 31, 2018. There are no encumbrances on Ladang Chuping.

The indicative financial commitment, inclusive of land-clearance cost and the acquisition cost, is about RM650 million in phase one.

In this phase, F&N AgriValley will import 4,000 milking cows, for a potential 40 million litres of fresh milk.

"Subsequent phases will take place upon stabilisation of phase 1," said F&NHB, adding that in the longer term, the land will be capable of hosting 20,000 cows to produce 200 million litres of milk each year.

Mature cows or post-lactation cows can be passed on to feedlot producers for beef, added F&NHB.

The plan is to start upstream milk insourcing within 24 months after vacant possession is delivered.

The integrated farm will include green technology such as solar panel roofing, a biodigester system that converts waste into bio-gas for energy generation, and the repurposing of solid effluent as soil nutrients.

Other than the milk processing plant, the integrated project will also develop a knowledge centre for dairy and crop farming, and seedling research centre.

For F&N, the dairies segment - including operations in Thailand, Malaysia, Singapore, and Vietnam - is the largest contributor to both revenue and profit before interest and taxation (PBIT).

In the third quarter ended June 30, dairies revenue was S$294.3 million, 60 per cent of the quarter's total revenue of S$489.7. Dairies PBIT was S$77.2 million, almost 85 per cent of total PBIT of S$90.97 million.

In its annual report for 2018, F&NHB noted higher costs for dairy-based inputs beside sugar. In its Q3 results, it noted that it is closely monitoring dairy input prices for the financial year ahead.

F&N's milk brands include F&N Condensed and Evaporated Milk, F&N Magnolia, Farmhouse, and Carnation.

Malaysia has had a National Dairy Industry Development Program since 1974. This August, Malaysia's agriculture minister said the country aims for self-sufficiency in local fresh milk production within the next five years.