Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with an unchanged fair value of RM1.33/share. Our fair value of RM1.33/share is based on a fully diluted FY22F PE of 18x.

• We view Tyson International’s entry as a shareholder in MFM’s poultry business positively as MFM would be able to leverage Tyson’s global customer network in the future. The poultry integrated plant in Lumut would also benefit from having Tyson as an off-taker. This would help boost sales volume and earnings of the poultry plant.

• MFM has proposed to sell 49% of its poultry unit to Tyson for RM420.0mil cash. The disposal price of RM420.0mil for the 49% stake values MFM’s poultry division at RM857.1mil. The proposed disposal is expected to be completed in 2QFY21. We have not accounted for the disposal of the poultry unit in MFM’s FY21F net profit yet.

• MFM will realise a gain of RM141.1mil from the disposal of the 49% stake. MFM will no longer consolidate the earnings or losses of the poultry unit as the division will be classified as joint venture. Hence, MFM will only recognise share of net profit in the poultry joint venture in the future.

• MFM would not be receiving all of the RM420.0mil cash proceeds at once. It will receive the initial consideration of RM140.0mil first. The second tranche of RM140.0mil will only be paid if the poultry unit achieves an EBITDA of RM141.0mil for FY22F. The third tranche of RM140.0mil will only be paid if the poultry division achieves an EBITDA of RM173.0mil in FY23F.

• If the EBITDA of the poultry division is less than RM54.0mil for FY21F, MFM will have to pay RM15.0mil to Tyson Foods. If the EBITDA is less than RM141.0mil in FY22F, the second tranche of consideration would be adjusted downwards accordingly. If the EBITDA is less than RM48.0mil in FY22F, MFM will not receive any cash. If the EBITDA is less than RM80mil in FY23F, MFM will not receive any cash. There are also net cash and debt levels to be met each financial year.

• From the initial consideration of RM140.0mil, MFM will use RM126.0mil to repay bank borrowings. MFM will use RM204.0mil from the second and third tranches of the disposal proceeds to repay bank borrowings. In total, MFM will use RM330.0mil out of the RM410.0mil proceeds to repay bank borrowings in stages.

• After five years, Tyson has the option to buy another 11% stake in the poultry unit. This would reduce MFM’s stake in the poultry unit further to 40% from 51%.

Source: AmInvest Research - 15 Feb 2021