Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with a lower fair value of RM0.69/share. Our fair value of RM0.69/share for MFM is based on an FY21F fully diluted PE of 15x. MFL is currently trading at a fully diluted FY21F PE of 12.6x.

• Although MFM’s 1QFY20 results were poor, we believe that the group would turn around in FY21F on the back of improved contribution from the new poultry processing plant in Lumut. Also, we expect demand for poultry products to rise in FY21F as Malaysia ends the movement control order (MCO) in June 2020. The improvement in demand would help normalise selling prices of live birds to the usual RM4.00-RM6.00/kg level in FY21F.

• We have reduced MFM’s net profit by 41.7% for FY20F and 12.4% for FY21F to account for weaker poultry operating profit margins. MFM was hit by a decline in live bird prices in 1QFY20 as demand from the fast food restaurants segment fell during the MCO in March 2020. We believe that live bird prices continued to be depressed in the month of April 2020.

• In early May, we believe that poultry prices had improved due to the closure of a poultry processing plant in Pedas, Negeri Sembilan. However, we reckon that the increase in poultry prices would be short-lived as the supply of poultry would go up when the plant resumes operations. The plant was closed from the first week of May until 20 May 2020 as some workers had contracted Covid-19. Kerabat Processing House has a slaughtering capacity of 90,000 birds per day.

• MFM reported a net loss of RM16.8mil in 1QFY20 vs. a net profit of RM19.9mil in 1QFY19. The YoY decline in net profit in 1QFY20 was due to weaker poultry earnings.

• The poultry division recorded a loss of RM29.2mil in 1QFY20 vs. an EBIT of RM1.9mil in 1QFY19. Apart from the fall in live bird prices, the poultry division was affected by higher depreciation expense in respect of the new plant in Lumut. The new plant started operations early this year.

• MFM’s flour EBIT was flat YoY at RM22.1mil in 1QFY20. Flour earnings were resilient in 1QFY20 underpinned by robust demand for bread and noodles during the MCO in March 2020.

• Flour EBIT margin was marginally lower at 4.4% in 1QFY20 vs. 4.7% in 1QFY19. According to Bloomberg, average price of soft red winter wheat rose by 2.1% YoY to US$5.48/bushel in 1QFY20. In Malaysia, about 95% of MFM’s flour products are non-general purpose flour.

Source: AmInvest Research - 18 May 2020