Investment Highlights

• We are upgrading Malayan Flour Mills (MFM) to BUY from HOLD with a higher fair value of RM0.87/share vs. RM0.67/share previously. Our fair value for MSM is based on a higher PE of 18x (vs. 14x previously) on an FY20F fully diluted EPS of 4.8 sen. MFM’s new fair value of RM0.87/share also implies an FY21F fully diluted PE of 15x.

• We believe that MFM deserves a higher PE as the group’s earnings are expected to be more stable after the commissioning of the new poultry plant in Perak. The new poultry plant is expected to start operations anytime soon. The new poultry plant would allow MFM to sell more dressed birds and reduce exposure to the volatile live bird market.

• MFM started operational tests at the new poultry plant a few weeks ago and results have been encouraging.

• MFM’s 9MFY19 results were within our expectations. After recording a net loss of RM0.6mil in 2QFY19, MFM swung into a net profit of RM20.7mil in 3QFY19. The earnings turnaround in 3QFY19 was driven mainly by the poultry division.

• On the back of higher selling prices of live birds, the poultry division posted an EBIT of RM7.5mil in 3QFY19 against a loss of RM16.6mil in 2QFY19. About 50% of MFM’s poultry are sold in the competitive live bird market. According to the Department of Veterinary Services (DVS), average wholesale selling price of live birds in Malaysia rose by 12.8% to RM5.54/kg in 3QFY19 from RM4.91/kg in 2QFY19.

• Earnings of the flour division were consistent in 3QFY19. The unit recorded an EBIT of RM25.2mil in 3QFY19 vs. RM22.4mil in 2QFY19.

• Comparing 9MFY19 against 9MFY18, MFM’s net profit rose to RM40mil from RM1.2mil due to an earnings recovery in the flour and poultry divisions. EBIT of the flour division expanded by 98.4% to RM69.6mil in 9MFY19 from RM35.1mil in 9MFY18 as selling prices of the non-GP (general purpose) flour rose. Flour EBIT margin was 4.8% in 9MFY19 vs. 2.7% in 9MFY18. About 95% of MFM’s flour revenue comprise sales of non-GP flour products.

• The poultry division recorded a smaller loss of RM7.2mil in 9MFY19 vs. RM9.2mil in 9MFY18 as the unit recovered from a poultry disease. Last year, the poultry disease caused a fall in the production of chickens and an increase in production costs. According to the DVS, average wholesale price of live birds in Malaysia slid by 2.5% to RM5.36/kg in 9MFY19 from RM5.50/kg in 9MFY18.

Source: AmInvest Research - 14 Nov 2019