Do You Know Fraser and Neave Limited Possesses This Small But Interesting Economic Moat?

Fraser and Neave Limited (SGX: F99) is a conglomerate with a massive food and beverage business in the region. The company distributes products such as soft drinks, dairy products, bottled tea, fruit juices, and much more, throughout Southeast Asia.

It also owns a stake in Vinamilk, the largest milk producer in Vietnam, through its Malaysia-listed subsidiary Fraser & Neave Holdings Bhd (KLSE:3689.KL)

The thing about Fraser and Neave’s business is that it might have an economic moat – or competitive advantage – with some of its products. One example is its F&N Ice Mountain brand of bottled drinking water.

F&N Ice Mountain is the leader in the bottled water space in Singapore. According to a recent media report, the bottled water industry in Singapore generated S$134 million in sales last year and it has been growing over the last eight years. Together with US beverage giant Coca Cola’s Dasani brand, F&N Ice Mountain controls over 50% of the entire bottled water market in Singapore.

Beyond its large market share, F&N Ice Mountain should also be an extremely profitable, albeit tiny, business for Fraser and Neave (the company generated total revenue of S$1.98 billion in its fiscal year ended 30 September 2016; this is a lot bigger than the size of Singapore’s bottled water market).

This is because the bottled water product is made in Fraser and Neave’s factory in Malaysia from purified tap water. And, according to industrial tap water rates in Malaysia, the cost per 1000 litres ranges from only between RM2.07 to RM3.30. In other words, the raw water cost for Fraser and Neave is less than RM0.01 per litre.

Of course, there are other costs involved with bottled water production. Fraser and Neave needs to sustain a factory to purify the water, bottle the water, and then transport the bottled water product to Singapore. But given that the retail price for a 600ml bottle of Ice Mountain in Singapore is around S$0.35 to S$0.60, you can imagine the gross margin on the product.

Given the strong branding and distribution of Ice Mountain in Singapore, this is definitely one of the ideal products for Fraser and Neave to continue selling. Right now, Fraser and Neave is trading at 28 times earnings and offers a 2.1% yield.

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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 does not own shares in any of the companies mentioned above.