For Investors: A Quick Overview Of The Cost Structure Of Fraser and Neave Limited’s Key Malaysian Subsidiary

Fraser & Neave Holdings Bhd (KLSE: 3689.KL) is listed in Malaysia and it is an important subsidiary of the Singapore-listed Fraser and Neave Limited (SGX: F99). In the 12 months ended 30 September 2016, Fraser & Neave Holdings accounted for around three-quarters of Fraser and Neave’s profit after tax.

The Malaysia-listed company is a major player in the food & beverage products market in Malaysia and it focuses on selling beverages (such as isotonic drinks, fruit teas, soft drinks, and more) and dairy products.

Over the past 10 years, Fraser & Neave Holdings has been a solid winner in Malaysia’s stock market with its total return of 402%. As such, I decided to take a deeper look at the company.

Now, as an investor, there are many important aspects to learn about a business. But in this article, I want to focus on just one – Fraser & Neave Holdings’ cost structure.

Here’s a simplified income statement for Fraser & Neave Holdings for its FY2015 (fiscal year ended 30 September 2015) and FY2016:

Fraser & Neave Holdings income statement
Source: Fraser & Neave Holdings FY2016 annual report

From the information in the table, there are a few observations we can draw:

  1. Fraser & Neave Holdings’ cost structure is mainly made up of four key expense categories, namely, Cost of Sales, Distribution, Marketing, and Administrative.
  2.  The majority of Cost of Sales comprises the cost of the raw materials Fraser & Neave Holdings needs to produce its beverages and dairy products. The thing about Cost of Sales is that it is variable in nature – it changes along with how much product the company sells. Having a good handle on its procurement capabilities would thus be the most feasible way for Fraser & Neave Holdings to control its Cost of Sales.
  3. Meanwhile, Distribution, Marketing, and Administrative expenses are mostly fixed in nature. What this means is the costs here are not directly correlated with Fraser & Neave Holdings’ sales volume. So, the company can improve its overall cost efficiency if it can grow its sales volume while being disciplined about its spending on distribution, marketing, and administrative purposes.

There are clearly some moving parts here when it comes to Fraser & Neave Holdings’ cost structure. But by understanding this aspect of the company’s business, investors would be able to gain clearer perspective on its future profitability.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.