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Fraser and Neave Limited Is About To Lose Its Growth Story

A scary piece of news broke on Halloween for Fraser and Neave Limited (SGX: F99): The company seems to have been essentially forced to sell its stake in fast-growing Myanmar-based beer purveyor, Myanmar Brewery.

Fraser and Neave had been in arbitration with Myanma Economic Holdings Limited (MEHL), a conglomerate controlled by Myanmar’s military powers, over Myanmar Brewery, the largest brewery in Myanmar. MEHL wanted to use legal powers to force Fraser and Neave to sell its 55% stake in Myanmar Brewery for a sum of US$246 million (around S$313 million).

As it turns out, the arbitral tribunal had ruled on Halloween that a sale would take place, but that the dollar-value of the sale would be determined “by an independent valuer to be appointed by both parties.” If a mutual agreement can’t be reached on a valuer, the tribunal would step in to appoint one.

With the tribunal’s judgment, iit seems that F&N might soon lose its exposure to the fast growing beer market of Myanmar. The following are the highlights which investors need to know.

At the beginning

MEHL had already sought to buyover Fraser and Neave’s Myanmar Brewery stake back in August 2013. But, F&N resisted any sale under the claim that the offer greatly undervalued the brewery, which accounted for roughly 64% of total beer sales in Myanmar in 2013, according to data from Euromonitor International.

There’re some merits to Fraser and Neave’s claim. At the price of US$246 million, MEHL was effectively valuing Myanmar Brewery at just 7.5 times its trailing earnings (as of 30 June 2014). And, this valuation was tabled “at a time when [Myanmar Brewery’s] profit is growing at a phenomenal rate of nearly 50% over the last year.”

For some perspective, the SPDR STI ETF (SGX: ES3) is valued at around 13.7 times its trailing earnings despite having experienced a long-run earnings growth rate of just around 5% to 6%. The SPDR STI ETF is a proxy for Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

The ruling

To reiterate,  Fraser and Neave announced on 31 October 2014 that the arbitral tribunal has ordered both parties to appoint an independent valuer for the proposed sale, indicating that F&N would likely receive a much higher price than the current offer of US$246 million. But, it also indicates that F&N would be forced to sell its stake to MEHL.

The loss of a powerful engine of growth

Fraser and Neave has never had the desire to sell off its stake in Myanmar Brewery, having invested in Myanmar since 1995 “at a time when many investors shied away” from the country. In fact, Fraser and Neave views Myanmar as one of the areas which can bring growth for the company since the country is opening its market.

Thailand-based alcoholic beverages maker Thai Beverage Public Company Limited (SGX: Y92) is the largest shareholder of Fraser and Neave. The former views the latter (and the latter’s stake in Myanmar Brewery) as an integral part of its overseas expansion strategy.

With the current ruling from the arbital tribunal, it’s likely that a dent has been made to Thai Beverage’s plans.

Foolish Summary

The decision by the courts is definitely a setback for Fraser and Neave. The company has already spun-off its property arm last year and now it’s faced with the seemingly inevitable sale of Myanmar Brewery. If Fraser and Neave fails to find an equally or even more impressive investment – when compared to Myanmar Brewery – with the dollars received in the sale, it would seem that the company’s prospects has just gotten dimmer.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.