- Maintain BUY, with new MYR1.85 TP from MYR1.88, 11% upside. Farm Fresh’s 1QFY23 (Mar) results missed expectations on higher-than- expected production costs. Despite the hiccup, we foresee margin recovery from 2QFY23F, given the implementation of price increases, contribution from products with better margins, and normalisation of raw material prices. In the longer run, its multi-pronged expansion plans, fresh dairy product proposition, and strong brand equity should underpin growth prospects.
- FFB’s 1QFY23 results were below expectations. Core net profit of MYR17m (-15% YoY) met only 18% of our and consensus’ forecasts on higher-than-expected input costs arising from the school milk project. Post results, we trim FY23F-25F earnings by 7%, 3% and 3%. Correspondingly, our DCF-derived TP (inclusive of a 6% ESG premium) drops to MYR1.85. The TP implies 32x 2023F P/E, which is at a premium over its mid-cap consumer staple peers.
- Results review. YoY, 1QFY23 revenue grew 7% to MYR144m thanks to the robust sales in Malaysia (+10%), but offset by lower sales in Australia (-16%) on the back of a planned downsizing of non-core business and the ceasing of external raw milk sales. Despite the flat GPM, 1QFY23 PBT fell 12% to MYR14m due to the higher sales and distribution (S&D) expenses that arose from the school milk project and ESOS expenses of MYR2m. QoQ, 1QFY23 sales was 13% higher following the broader reopening of the economy and contribution from new products. However, 1QFY23 gross profit only inched up by 3% on a 2.4ppts GPM slippage, dragged by higher input costs for the school milk project. Core net profit was 5% lower QoQ due to the abovementioned higher opex.
- GPM should stage a quick rebound. The group has raised the prices for its chilled ready-to-drink (RTD) products in Malaysia (effective mid-July) and Singapore (effective August) by an average of 5% and 10% in order to pass on the higher input costs. This should arrest GPM erosion going forward, further aided by the normalisation in skimmed milk powder prices. The new product launches in the UHT and growing up milk segments should also increasingly contribute in the quarters ahead, whilst FFB is also targeting to improve its market penetration in Singapore, followed by the planned entry into Indonesia, the Philippines and Hong Kong. These expansion plans will be supported by the new capacity coming on stream progressively over the next 1-2 years.
- Risks to our recommendation include a sharp rise in commodity prices and major delays in expansion plans.
Source: RHB Research - 25 Aug 2022