Investment Highlights

• We are keeping our HOLD recommendation on Malayan Flour Mills (MFM) with an unchanged fair value of RM0.67/share. Our fair value for MFM is based on an FY20F fully diluted PE of 14x.

• We understand that selling prices of live birds in the poultry industry plunged in 2QFY19 due to a surge in supply. This was partly due to an increase in chicken imports from Thailand and Brazil.

• Excluding imports, the poultry industry is estimated to record an expansion in the supply of live birds of 70mil in 2019E driven mainly by an increase in contract farming. The rise in supply of 70mil is roughly 9% of the poultry industry’s production of more than 800mil live birds in 2018.

• The silver lining is that industry selling prices of live birds stabilised in July and August 2019. According to the Department of Veterinary Services, average price of wholesale live bird was RM5.83/kg in July and August 2019 vs. RM5.78/kg in the same period last year. Also in the first week of September, average price of wholesale live bird was 13% YoY higher.

• Hence, we believe that MFM’s poultry division may return to the black in 3QFY19. To recap, the poultry unit recorded a loss of RM16.6mil in 2QFY19 due to the drop in prices of live birds.

• MFM’s RM550mil poultry processing plant in Lumut is expected to start commercial operations in November 2019. With the new plant, MFM would be able to sell more dressed chickens to end customers instead of live birds in the wholesale market.

• This would help reduce the group’s exposure to the live bird market, where the selling prices are more volatile and the margins are lower. Currently, about 50% of MFM’s broilers are sold as live birds.

• The new poultry plant is expected to start producing 85,000 birds/day before rising to a 50% utilisation rate of 120,000 birds/day in FY20F. We have assumed a conservative EBIT margin of 2% for the poultry division in FY20F compared with 1.0% in FY19E. Average EBIT margin was 5.0% from FY13 to FY17. Recall that the poultry division recorded a loss of RM0.9mil in FY18 as it was hit by a poultry disease, which affected production volumes.

Source: AmInvest Research - 25 Sept 2019