Investment Highlights

• We maintain BUY on Malayan Flour (MFM) with a higher fair value of RM1.37/share (vs. RM1.33/share previously). Our fair value for MFM is based on an FY22F fully diluted PE of 18x. After that, we applied a 3% premium to reflect MFM’s four star rating for ESG. MFM is currently trading at FY21F fully diluted PE of 17.4x and FY22F fully diluted PE of 11.7x. We have not accounted for the RM420.0mil disposal of the 49% stake in the poultry division to Tyson Foods, in MFM’s FY21F net profit yet.

• In terms of ESG, we ascribe four out of five stars to MFM. The high rating is due to the group’s strict biosecurity measures at its poultry facilities in Perak and international certifications such as HACCP (Hazard Analysis and Critical Control Points) and VHM (Veterinary Health Mark).

• We expect a strong earnings rebound of more than twofold in FY21F underpinned by the following:-

(1) Higher selling prices of poultry due to lower supply. We understand that a few producers of poultry products in Malaysia have reduced their production as raw material costs have risen. Since the middle of last year, US soybean price has surged by 54.7% to about US$13.83/bushel while US corn price has climbed by 41.1% to roughly US$5.32/bushel.

(2) Lower exposure to the live bird market. MFM is currently selling more processed chicken products instead of live birds. The difference in the selling prices of processed poultry and live birds ranges from RM2.00 to RM3.00/kg. Selling prices in the processed poultry products are also less volatile compared with live birds. Currently, MFM only sells 10% (vs. 50% previously) of its poultry products to the live bird segment while the larger 90% are processed products sold to the HORECA segment.

• In the longer term, we reckon that MFM would benefit from:

(1) Tyson’s partnership. MFM has a long-term off-take agreement with Tyson. Through Tyson’s global network, MFM would be able to export halal poultry products to Singapore and the Middle East in the future. This would boost MFM’s sales volumes and customer reach. We understand that the long-term value of MFM’s 51% stake in the poultry division with Tyson on board could be worth more than MFM holding a 100% shareholding.

(2) Diminishing live bird market in Malaysia. The market for processed products is expected to grow as more states mull exiting the live bird market. Buying live birds in the wet market is deemed unsanitary and unhygienic. There would not be any live bird market in Penang in FY22F while Petaling Jaya is mulling doing the same. As MFM’s integrated poultry plant in Lumut has a processing capacity of 240,000 birds per day, the group is expected to benefit.

Source: AmInvest Research - 3 Mar 2021