• FPHB has a strong track record of 20 years in the wholesale distribution of freshvegetables and we believe this will be in line with the food security theme and expectto tag along the Johor-Singapore growth story going forward.

• For FY24-25f, we project bottomline to increase by 16.6-25.1% to RM10.1-12.7m, supported by the planned increase in operating shifts to meet customer demand.

• We ascribe a fair value of RM0.445 for FPHB. Our valuation derived by pegging a forward P/E of 15.7x to the FY25f EPS of 2.82 sen. We believe a forward P/E of 15.7x is justified as it is in line with the average 2FY forward P/E of selected peers within the Packaged Foods sub-industry.

Investment Highlights

Overcoming current utilization limits to cater for growing demand. As of LPD, Farm Price Holdings Bhd (FPHB)’s cold room facilities are running at a >95% utilization rate. In the short term, FPHB plans to increase the number of processing shifts in the Senai Centralised Distribution Centre (SCDC). This can be carried out despite the high utilization rate, as FPHB plans to increase the frequency of deliveries, rent ad-hoc on site refrigerated containers, as well as renting temporary warehouses as needed. This is to ensure that FPHB is able to store and deliver more vegetables to meet demand, which will provide a significant boost to the topline and bottomline.

New production facilities to improve floor space by 90%. The planned utilization of IPO proceeds is partly to fund the construction of new facilities which expands the current SCDC and the purchase of new equipment and logistics fleet. The expansion facilities are targeted to be operational by FY26, adding ~54k sqft operational area, 10k sqft ambient warehouse area and will increase the capacity of cold room facility by the addition of c.35% in pallet capacity to ~40k pallets a year. Therefore, we have a substantial basis for a significant growth to FPHB’s topline moving forward.

Comparable margins going forward. FPHB had seen a lower GP margin from FY20-22 due the nature of the business, where vegetable pricing contracts are signed which fixes the price that FPHB sells its vegetables to some of its customers, while in the same period CPI for vegetables increased substantially, therefore FPHB had to absorb the cost increase. However, going forward, we believe that the vegetables prices will normalised, barring any unforeseen circumstances such as (i) lockdowns from health pandemics, (ii) shipping delays and (iii) heightened geopolitical tension. Thus, we anticipate margins of FPHB should remain relatively stable, comparable to FY23.

Strong track record to help secure more customers. FPHB has a strong track record having being in the industry for 20 years. A unique advantage FPHB has over competitors in Singapore is that FPHB can take advantage of lower production costs by virtue of having operations in the Malaysia, coupled with SCDC’s operations being located in the southern region providing a short delivery time which preserves the product’s freshness. This unique feature of FPHB vis-à-vis its Singaporean peers, makes FPHB much more competitive. Furthermore, we are aware that FPHB is currently in talks with potential customers, drawing on FPHB’s competitive advantages and strong track record, we have a strong conviction on FPHB to secure more customers in Singapore going forward.

Company Background

FPHB was established by Dr Tiong Lee Chian and Liew Yee Fan @ Liew Chew Lan in 2001, each holding 50% equity stake, respectively. FPHB was involved in the manufacturing of mannequins before pivoting into the wholesale distribution of fresh vegetables in 2004. In 2007, Liew Tsuey Er acquired the 50% equity stake from his father Liew Yee Fan @ Liew Chew Lan, while Dr Tiong maintains his 50% stake.

Business Segments

1. Wholesale Distribution (93.6% of FY23 Revenue)

FPHB’s main bulk of revenue is generated from the wholesale distribution of fresh vegetables, which comprises of whole vegetables, prepacked vegetables and fresh-cut vegetables (Fig #5) through indirect and direct distribution channels to wholesalers, retailers, food service operators and manufacturers (Fig #4) in Malaysia and Singapore.

The vegetables are sourced from domestic and foreign farmers, distributors and importers, which enables FPHB to sell a wide variety of vegetables (up to 980 SKUs) such as fruit vegetables, leafy vegetables, bulb vegetables, etc (Fig #6). After sourcing the vegetables, FPHB will further process the vegetables in their mainstay SCDC which houses cold room facilities for storage, processing and packing, coupled with ambient temperature storage, processing and packing space.

Once the SCDC receives the vegetables, selected vegetables go through processing such as washing, trimming, sorting, etc before storage or delivery. To preserve the freshness of vegetables, some vegetables are stored in chilled storages before delivery. The vegetables are then either delivered directly to food service industry players or indirectly to 3rd party retailer or wholesalers.Furthermore, FPHB is also involved in the wholesale distribution of F&B products and other groceries such as packaged beverages, spices and seasonings, snack foods as well as personal care products. Some of the packaged beverages are FPHB’s own brands, while the others are 3rd party brands.

2. Retail Segment (6.4% of FY23 Revenue)

FPHB also operates a retail store in Puteri Mart Ulu Tiram Johor named “Mamaku” (Fig #8). The store sells a wide range of products from whole and prepacked fresh vegetables, packaged beverages to other groceries. Several of the retail fresh vegetables and F&B products are obtained from FPHB’s wholesale distribution.

Financials

In FY23, FPHB’s net profit rose 83% YoY to RM8.7m following a topline improvement to RM114.2m (+20.9% YoY), following the higher revised selling price and increased orders of the fresh cut vegetables for customers in Singapore. Besides, the new packaging machines helped FPHB to cater to the increased demand for packaged vegetables, as well as a general demand increase for its products including fresh vegetables, F&B products, other groceries and others seen within both segments.

For FY23, the improvement in profit margins is mainly attributed to the decrease in prices of vegetables due to the robust supply condition, coupled with some upwards revision of prices with FPHB’s customers, which lead to a larger profit margin. Other factors contributed as well, such as the favourable exchange rate with the depreciation of the ringgit and improvement in operational efficiencies.

We project topline to grow at 14.7-19.4% to RM131.0-156.4m for FY24-25f, respectively, supported by the increase in operating shift to meet customer demand from Singapore. Meanwhile, we forecast core net profit to increase by 16.6-25.1% to RM10.1-12.7m, respectively as margins should remain comparable to FY23.

Valuations

We ascribe a fair value of RM0.445 for FPHB. Our valuation derived by pegging a forward P/E of 15.7x to the FY25f eps of 2.82 sen. We believe a forward P/E of 15.7x is justified as it is in line with the average 2FY forward P/E of selected peers within the Packaged Foods sub-industry of 15.7x.

Investment risks

Economic, social, political and regulatory risks. Changes in the economic, social and political landscape, which may give rise to unfavorable tariffs, embargos, etc.

Risk of impairment on trade receivables. By extending credit to customers, FPHB runs a risk of failure to receive outstanding payments from customers which may impact profitability.

Fluctuations in fresh vegetables prices. Any inability to pass on the price increase of fresh vegetables may adversely affect financial performance.

Dependent on key senior management. Discontinuation of service of the key senior management may disrupt key decision making within FPHB’s business operations.

Source: Mplus Research - 30 Apr 2024