Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with an unchanged fair value of RM0.87/share. Our fair value of RM0.87/share for MFM is based on an FY20F PE of 18x. We are keeping our FY19E and FY20F earnings forecasts for MFM.

• We believe that MFM’s earnings volatility would decline in 2HFY20 as the group reduces exposure to the live bird market.

• We reckon that in 2HFY20, MFM would be selling only 20% of its poultry to the volatile live bird market compared with 50% currently. By ramping up production at the new poultry plant in Lumut, Perak, MFM would be able to sell more dressed chickens to its end customers such as QSR Brands in 2HFY20.

• The decline in the exposure to the live bird market is expected to be driven by MFM’s new poultry plant in Lumut. MFM is anticipated to ramp up production at the new poultry plant in Lumut in 2HFY20.

• Currently, MFM is slaughtering about 80,000 to 90,000 birds per day at the new plant. This is expected to increase to 160,000 birds per day in 2HFY20. Full capacity is about 240,000 birds per day. MFM’s new poultry plant in Lumut started operations in late 2019.

• We expect MFM’s flour division to continue to perform well in FY20F on the back of higher sales volume and selling prices. We forecast MFM’s flour EBIT to grow by more than 10% in FY20F.

• We believe that about 95% of MFM’s flour revenue consist of sales of non-general purpose flour products. Hence, the group is able to increase selling prices of some of its flour products if wheat prices rise.

• MFM usually locks in its wheat inventory about three months ahead. Although wheat prices rose in 4QFY19, they have eased in the past week over fears that the coronavirus may affect China’s demand.

• According to Bloomberg, average price of soft red winter wheat has been US$5.66/bushel so far in January 2020 compared with US$5.33/bushel in 1QFY19 and US$5.60/bushel in January 2019.

Source: AmInvest Research - 30 Jan 2020