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. We expect MFM’s earnings to improve in FY21F on the back of higher sales volume and margin enhancements from the poultry plant in Lumut. The new plant started operations early this year.

• MFM’s 1HFY20 results were within our expectations. We believe that MFM would return to the black in the next few quarters on the back of improved poultry prices. MFM recorded a smaller net loss of RM4.5mil in 2QFY20 compared with RM16.8mil in 1QFY20.

• The QoQ decline in net loss in 2QFY20 was underpinned by higher flour EBIT. Flour EBIT surged by 50.1% QoQ to RM33.1mil in 2QFY20 as operating margin expanded. Sales volume for MFM’s flour products was robust in 2QFY20.

• Flour EBIT margin was 6.4% in 2QFY20 against 4.4% in 1QFY20. EBIT margin was 5.4% in 1HFY20 compared with 4.8% in 1HFY19. We attribute the QoQ and YoY rise in EBIT margins to higher selling prices of flour products.

• EBIT of the flour division was RM55.2mil in 1HFY20 vs. RM44.4mil in 1HFY19. About 95% of MFM’s flour products in Malaysia are non-general purpose flour.

• According to Bloomberg, average price of soft red winter wheat was flat YoY at US$5.36448/bushel in 1HFY20. On a quarterly basis, average price of soft red winter wheat dived by 6.0% to US$5.19956/bushel in 2QFY20 from US$5.53206/bushel in 1QFY20.

• The poultry division performed poorly in 2QFY20, dragged by the fall in selling prices. Average wholesale live bird prices only started exceeding the RM6.00/kg level from June 2020 onwards. Poultry losses were RM28.0mil in 2QFY20 and RM29.2mil in 1QFY20.

• According to the Department of Veterinary Services (DVS), selling price of wholesale live birds hit a two-year high of RM6.80/kg in the week ending 19 June 2020. However on a quarterly basis, average price of wholesale live birds was RM5.32/kg in 2QFY20 vs. RM5.22/kg in 1QFY20.

• Comparing 1HFY20 against 1HFY19, the poultry division recorded a larger loss of RM57.1mil in 1HFY20 vs. RM14.8mil in 1HFY19 due to a higher depreciation expense in respect of the new poultry plant in Lumut. Average price of wholesale live birds was RM5.26/kg in 1HFY20 compared with RM5.28/kg in 1HFY19.

Source: AmInvest Research - 28 Aug 2020