Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with a lower fair value of RM0.78/share (vs. RM0.87/share previously). Our fair value for MFM implies an FY20F fully diluted PE of 18x.

• We have reduced MFM’s FY20F net profit by 10% to account for a weaker EBIT margin for the poultry division.

• To be conservative, we are now expecting a loss (EBIT level) of RM14.6mil in the poultry division in FY20F vs. a small profit originally. MFM’s new poultry plant in Lumut has started operations. The plant is likely to record losses in the first year of operations due to low utilisation rates and high interest and depreciation expenses.

• However, we believe that the plant augurs well for MFM in the long term. With the plant, MFM would be able to sell more broilers to end customers such as quick service restaurants. This would help reduce MFM’s exposure to the volatile live bird market. Currently, about 50% of MFM’s chickens are sold in the live bird market.

• MFM’s FY19 net profit of RM43.6mil was below our forecast of RM50.6mil due to losses in the poultry division in 4QFY19.

• The poultry division recorded a loss of RM24.7mil in 4QFY19 against an EBIT of RM7.5mil in 3QFY19. Selling prices of poultry products were lower in 4QFY19 compared with 3QFY19.

• According to the Department of Veterinary Services (DVS), average wholesale selling price of live birds in Peninsular Malaysia was RM4.78/kg from October to early November 2019 vs. RM5.54/kg in 3QFY19.

• Flour earnings were robust in 4QFY19 due to higher selling prices. The flour division recorded an EBIT of RM45.1mil in 4QFY19 compared with RM25.2mil in 3QFY19. EBIT margin was 8.0% in 4QFY19 against 4.8% in 3QFY19.

• Comparing FY19 against FY18, MFM’s poultry division recorded a larger loss of RM31.9mil vs. RM0.9mil. The weak performance in FY19 was due to lower selling prices of live birds. According to the DVS, average wholesale selling price of live birds in Peninsular Malaysia slid by 3.5% to RM5.28/kg in FY19 (until early November) vs. RM5.47/kg in FY18.

• Earnings of the flour division climbed by 74.0% to RM114.7mil in FY19 from RM65.9mil in FY18 on the back of higher selling prices of non-GP (general purpose) flour products. EBIT margin was 5.7% in FY19 against 3.7% in FY18. About 95% of MFM’s flour products comprise nonGP flour products.

Source: AmInvest Research - 28 Feb 2020