Investment Highlights

• Maintain BUY on Malayan Flour Mills (MFM) with an unchanged fair value of RM0.89/share. Our fair value implies an FY20F fully diluted PE of 14.6x.

• Our recent meeting with MFM affirms our positive outlook on the group. We believe that MFM’s net profit would recover in FY19F after being hit by a string of issues in FY18.

• We expect EBIT of the flour division to improve by 11.1% to RM73.2mil in FY19F on the back of lower wheat costs. Wheat accounts for more than half of the production costs. MFM buys wheat from different countries such as Australia, Canada, the USA and Russia. The group imports a variety of wheat as different types of wheat have different levels of protein for flour products, for example, the flour used to make bread is different from that used for noodles.

• Using soft red winter wheat as a gauge and according to Bloomberg, average price of wheat has declined by 7.4% to US$4.93898/bushel in 1QFY19 from US$5.33475/bushel in 1QFY18.
• We expect the poultry division to swing to a positive EBIT of RM34.6mil in FY19F from a loss of RM0.9mil in FY18 on the back of higher sales volume and lower feedmeal costs. After being hit by a poultry disease and fewer contract farmers in FY18, we believe that sales volume of live birds and broilers would increase in FY19F.
• Feedmeal accounts for almost 70% of the cost of production of the poultry division. Feedmeal comprises mainly corn and soybean. Corn and soybean prices have been in the doldrums due to ample global inventories. According to Bloomberg, average price of US soybean was US$9.17393/bushel in 1QFY19 vs. US$10.20381/bushel in 1QFY18.

• As for selling price, the Department of Veterinary Services said that the average selling price of live birds was flat YoY but 6.7% higher QoQ in 1QFY19. In the first week of April, the selling price of live birds declined by 8.3% YoY. We gather that this was due to weak demand. We understand that demand for chickens would start to pick up again in the next few weeks ahead of the fasting period in May and Hari Raya Aidilfitri festivities in June.

• MFM’s new poultry plant in Lumut is expected to be commissioned in 4Q2019. The new plant will increase MFM’s slaughtering capacity to 120,000 birds per day in the first year of operations from 80,000 birds per day currently. MFM would be able to raise its broiler population to more than 80mil from 66mil per year. These are expected to underpin the group’s net profit growth in FY20F and FY21F.

Source: AmInvest Research - 15 Apr 2019