Conglomerates

F & N, who has recently hogged the spotlight for its search on a more effective management structure of its different divisions, recently posted a set of results for the 3QFY08, with revenue dropping 7.5% year-on-year to S$1.2billion, and net profit rising 13.6% to $110.3million. The F&B and property arm of the conglomerate posted revenue growth, whilst the Printing & Publishing division(P&P) posted a slight decline. Without going through the financial statements again, I would like to express my views on the recent shake-up developing within F&N.

F&N has profitted from the recent property boom, which has boosted its bottom-line, whilst the F&B and P&P segments have dragged the performance of the business down, or so as analysts would have you believe.

However, with the recent downturn in the property market, the property division of F&N will probably fail to repeat their sterling performance in recent years, or worse, bring down the performance of the company. So the question that shareholders should be asking is: is this the right time to spin off the P&P and F&B divisions?

Look no further than Sembcorp Industries and Keppel Corp for a clue to answering this question. Keppel Corp's results were dragged down by Keppel Land's delay in launches, but their results were propped up by the Offshore & Marine (O&M) segment. As for SCI, its entire business ex marine(including Utilities, Parks, Environmental Engineering etc.) was a disappointment, but the reason why it managed to eke out a marginal 1H08 net profit growth of 1% was because of the stellar O&M division on the back of a $9.4 billion order book. Now, if both Keppel and SCI had seen their other underperforming divisions as a drag to earnings, would spinning off be better? But, would they have anticipated the lacklustre performance even before it had started?

The reason why this conglos have their heads above their waters is because of the diversified nature of their business. While the property arm of Keppel Corp did badly, the O&M segment shone. While the utilities and other divisions of SCI did badly, their O&M division shone. The nature of Keppel's business is that both the property and O&M segments are cyclical in nature, but it just so happens that these cycles overlap each other to a certain extent, so when one is on the downtrend, the other just so happens to be on the uptrend. So, who is to say that the property arm of Keppel is dragging down its earnings? In a few years to come, the exact opposite might happen. But well, I shall not touch on the topic of diversification for now.

Now, let's go back to F&N's business. The P&P and F&B divisions are not exactly the most cyclical divisions. People don't drink more F&N Grape because the weather is hot in January, nor do they start to print more brochures in June because it's the school holidays and there are people out in the streets to take notice of the flyers. They are stable, cash generating businesses which unfortunately, do not grow as much as their shareholders would like them to. As for the property arm, it is famously cyclical, although I wouldn't comment on whether the property market is starting a downtrend or not. However, what you will have to agree with me is that there is a pronounced slowdown at this moment of time. Now, wouldn't this be a really bad time for F&N to spin off its business? It's easy to denounce the P&P and F&B divisions during times of good growth for the property arm, but their importance is only emphasised more during trying periods like this. You don't miss your Printing & Publishing and Food & Beverage divisions until your coffers run dry.

Just some food for thought.