Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with an unchanged fair value of RM1.37/share. Our fair value is based on an FY22F PE of 18.0x and a 3% premium for a fourstar ESG rating. MFM is currently trading at an undemanding FY22F PE of 8.7x.

• We expect MFM’s share of net loss in its joint venture to decline in 2HFY21 (2QFY21 loss: RM10.5mil). MFM’s 51% poultry joint venture with Tyson International is expected to benefit from higher demand and selling prices of processed poultry products.

• Poultry prices are rising due to a shortage in supply and improved demand following the relaxation of MCO 3.0. Faced with weak demand at the peak of MCO 3.0 but rising production costs at the same time, some poultry producers have cut output. We gather than industry supply of poultry may have shrank by 20%–30%. On the other hand, feed meal costs have climbed by over 50% since last year due to the rise in soybean and corn prices.

• We understand that average ex-farm live bird price is now higher than RM6.00/kg vs. the weekly low of RM3.74/kg in June. Also, according to the Department of Veterinary Services, average monthly price of processed standard chicken was RM8.45/kg in August vs. RM8.30/kg in January.

• The poultry joint venture is expected to enjoy higher sales volume in 2HFY21 as dine-in restrictions in the Klang Valley have eased. The poultry plant in Lumut is currently operating at a utilisation rate of 50% compared with 20% to 30% during MCO 3.0. The poultry plant is envisaged to achieve a utilisation rate of 60% in FY22F, which would allow the plant to break even.

• MFM is expected to benefit from the strategic partnership with Tyson from their collaborations on product offerings and processes to improve production efficiencies. Going forward, about 10% to 20% of MFM’s production volumes are expected to be channelled to Tyson. In the long term, MFM plans to tap into the halal export markets such as the Middle East via Tyson’s network.

• MFM’s flour division is expected to perform well in FY21E in spite of the increase in wheat costs. We believe that the group has raised the selling prices of some of its flour products due to the higher cost of wheat. We also reckon that MFM’s flour division benefited from purchases carried out when prices of wheat plunged in 3QFY20.

• We forecast EBIT of the flour division to grow by 34.3% to RM164.5mil in FY21E on the back of higher selling prices and sales volume. Flour EBIT margin is anticipated to be 7.0% in FY21E vs. 5.9% in FY20.

Source: AmInvest Research - 13 Oct 2021