Getting A Grip on The Inventory Management Of Fraser & Neave Holdings Bhd, A Key Subsidiary Of Fraser and Neave Limited

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.

As a food & beverage products manufacturer, Fraser & Neave carries a significant amount of inventory. As of 30 September 2016, the company’s inventory value is RM 517.3 million. It is thus important for investors to look at how well Fraser & Neave is managing its inventory.

To do so, I will look at two things: (1) Changes in the value of the company’s inventory as compared to changes in revenue; and (2) the day sales of inventory, which is also known as inventory days.

Changes in inventory value

The ideal case here is to see inventory levels decline while revenue increases. If not, we’d want to see inventory levels ebb and flow along with revenue.

Here’s a chart showing Fraser & Neave’s revenue and inventory from its FY2012 (fiscal year ended 30 September 2012) to FY2016:

Fraser & Neave revenue and inventory chart
Source: Fraser & Neave annual reports

For the period under study, Fraser & Neave saw its revenue and inventory grow by 29% and 40%, respectively. In other words, the rate of growth of the value of Fraser & Neave’s inventory has been higher than its revenue.

Inventory days

Put simply, inventory days indicates the average number of days a company takes to clear its inventory. Ideally, we what we want to see is a stable or declining inventory days.

The metric is calculated with the following formula:

(Closing inventory) / (Cost of sales) x (365 days)

The chart below plots Fraser & Neave’s inventory days from its FY2012 to FY2016:

Fraser & Neave inventory days
Source: Fraser & Neave annual reports

We can see that the company’s inventory days had initially declined from 58 in FY2012 to 52 in FY2013. But since then, Fraser & Neave’s inventory days started climbing and ended FY2016 at 70.

A Foolish conclusion

Given what we’ve observed – inventory growth that has outstripped revenue growth, and a higher inventory days – Fraser & Neave’s inventory management appears to have weakened considerably from its FY2012 to FY2016.

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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.