• We maintain BUY on Malayan Flour Mills (MFM) with an unchanged 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 believe that MFM’s earnings would improve in FY21F on the back of an increase in poultry demand and margin enhancements from the poultry plant in Lumut. The plant in Lumut would help reduce MFM’s exposure to the volatile live birds market. Currently, about 50% of MFM’s poultry products are sold to the live birds market.

• Although MFM swung into the black in 3QFY20, the group’s 9MFY20 results were below our forecast due to a weaker-than-expected operating profit margin from the poultry division and a higher-than-estimated effective tax rate. We have reduced MFM’s FY20E net profit by 69.9% to account for these items.

• Comparing 3QFY20 against 2QFY20, MFM reported a net profit of RM9.4mil vs. a net loss of RM4.5mil. This was underpinned mainly by a profit turnaround in the poultry division.

• The poultry division registered an EBIT of RM2.2mil in 3QFY20 compared to a loss of RM28.0mil in 2QFY20. According to the Department of Veterinary Services (DVS), average price of wholesale live bird improved to RM5.46/kg in 3QFY20 from RM5.32/kg in 2QFY20. Also, demand for processed poultry products from the food services and retail channels recovered in early-3QFY20 as economic restrictions eased.

• Comparing 9MFY20 against 9MFY19, MFM reported a net loss of RM11.9mil against a net profit of RM40.0mil in 9MFY19. The group swung into the red in 9MFY20 dragged by soft poultry prices in 1HFY20 and recognition of depreciation and interest expenses for the new poultry plant in Lumut.

• The poultry division recorded larger losses of RM54.9mil in 9MFY20 compared with RM7.2mil in 9MFY19. The new poultry plant in Lumut started operations early this year.

• Poultry prices were flat YoY in 9MFY20. According to the Department of Veterinary Services, average price of wholesale live bird was RM5.33/kg in 9MFY20 vs. RM5.36/kg in 9MFY19.

• The flour division performed well in 9MFY20. Flour EBIT climbed to RM76.8mil (ex-disposal gain of RM8.5mil) in 9MFY20 from RM69.6mil in 9MFY19. EBIT margin of the division improved to 5.2% in 9MFY20 from 4.8% in 9MFY19. We attribute the enhancement in EBIT margin of the flour division in 9MFY20 to the low cost of wheat in 1HFY20.

Source: AmInvest Research - 23 Nov 2020