Investment Highlights

• We are downgrading our recommendation on Malayan Flour Mills (MFM) to HOLD from BUY with a lower fair value of RM0.67/share (vs. RM0.89/share previously). Our fair value for MFM implies a fully diluted FY20F PE of 14x.

• We have reduced MFM’s FY19E net profit by 27.8% to account for a lower EBIT margin for the poultry division. The poultry division suffered an erosion in EBIT margin in 2QFY19 due to a drop in the prices of live birds.

• According to the Department of Veterinary Services, average wholesale price of live birds in Malaysia declined by 10.6% to RM4.91/kg in 2QFY19 from RM5.49/kg in 2QFY18.

• MFM recorded a net loss of RM0.6mil in 2QFY19 compared with a net profit of RM19.9mil in 1QFY19. MFM was dragged mainly by an RM16.6mil loss in the poultry division, higher depreciation expense and an impairment of RM5.4mil on trade receivables in 2QFY19.

• On a positive note, the flour division sustained its earnings in 2QFY19. EBIT of the flour division was relatively unchanged QoQ at RM22.4mil in 2QFY19, EBIT margin of the flour division was 4.8% in 2QFY19 vs. 4.7% in 1QFY19.

• The flour division benefited from an increase in the selling prices of non-general purpose (GP) flour products and realised and unrealised fair value gains on derivatives. The fair value gains amounted to RM7.8mil in total in 2QFY19. More than 95% of MFM’s revenue consist of sales of nonGP flour products.

• Comparing 1HFY19 against 1HFY18, MFM’s net profit improved by 203.1% to RM19.3mil driven mainly by the flour division. EBIT of the flour unit surged by 153.5% YoY to RM44.4mil in 1HFY19 on the back of higher selling prices. Losses in the poultry division were RM14.8mil in 1HFY19 compared with an EBIT of RM4.0mil in 1HFY18.

• MFM’s net gearing stood at 77.4% as at end-June compared with 70.7% as at end-March 2019. MFM’s gross cash stood at RM246.6mil as at end-June 2019 while gross borrowings (inclusive of RCULS) amounted to RM1.09bil.

Source: AmInvest Research - 15 Aug 2019