Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with an unchanged fair value of RM1.37/share. Our fair value of RM1.37/share is based on a fully diluted FY22F PE of 18x and a 3% premium for a four-star ESG rating.

• MFM’s annualised 1HFY21 core net profit was above our forecast. We have raised MFM’s FY21E core net profit by 21.4% to account for lower interest expense, higher interest income and the deconsolidation of losses from the poultry division.

• As the disposal of the 49% stake in the poultry assets to Tyson International has already been completed, MFM would only be recognising 51% of the poultry’s losses or earnings going forward, instead of 100%. The poultry division’s contribution will be recognised under share of net profit in joint ventures. The proposed disposal was completed on 31 May 2021.

• MFM reported a net profit from continuing operations of RM60.2mil in 1HFY21 vs. the restated net profit of RM37.6mil in 1HFY20. The YoY jump in net profit in 1HFY21 was underpinned mainly by a 59.1% surge in flour EBIT and 51.8% drop in interest expense.

• MFM’s flour division recorded an EBIT of RM87.8mil in 1HFY21, 59.1% higher than the RM55.2mil registered in 1HFY20. Flour EBIT margin rose to 8.0% in 1HFY21 from 5.4% in 1HFY20. We attribute the 59.1% YoY rise in flour EBIT in 1HFY21 to higher selling prices, higher sales volume and lower cost of wheat recognised in 1QFY21.

• Comparing 2QFY21 against 1QFY21 however, flour EBIT declined by 19.6% to RM39.1mil. The QoQ fall in flour EBIT in 2QFY21 was due to a squeeze in margin resulting from higher wheat costs. Flour EBIT margin was 6.9% in 2QFY21 vs. 9.3% in 1QFY21.

• We believe that the poultry division’s losses (assuming 100% stake) were RM30.8mil in 2QFY21. This was higher than the loss of RM21.6mil in 1QFY21 as sales volume and selling prices of products in the non-live bird segment dropped due to restrictions on dine-in.

• In the live bird segment however, selling prices were higher QoQ in 2QFY21. According to the Department of Veterinary Services, average price of ex-farm live bird was marginally higher at RM5.14/kg in 2QFY21 vs. RM4.94/kgin 1QFY21. About 10% of MFL’s sales volume are from the live bird segment.

Source: AmInvest Research - 23 Aug 2021