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 is not expected to be affected by the prosperity tax in Malaysia as we forecast its FY22F net profit to be just slightly higher than the threshold level of RM100.0mil. In addition, a significant portion of MFM’s flour earnings is from Vietnam.

• MFM’s annualised 9MFY21 net profit was within our forecast.

• MFM’s core net profit dropped to RM3.9mil in 3QFY21 from RM18.8mil in 2QFY21. MFM made a provision of RM15.0mil as a profit guarantee payment to Tyson International in 3QFY21. This is due to the shortfall in the estimated EBITDA for FY21E, which was guaranteed at RM58.0mil to Tyson. If the poultry division’s EBITDA is less RM54.0mil for FY21E, the payment to Tyson is RM15.0mil.

• Excluding the profit guarantee payment, MFM’s net profit would have been RM18.9mil in 3QFY21, which is similar to 2QFY21.

• On a positive note, the poultry division recorded a smaller net loss of RM32.8mil in 3QFY21 compared to RM36.6mil in 2QFY21 underpinned by a recovery in the sales volume and selling prices of poultry products.

• According to the Department of Veterinary Services (DVS), average weekly price of ex-farm live bird was RM5.22/kg in 3QFY21 vs. RM5.14/kg in 2QFY21. About 10% of MFM’s poultry products are sold to the live birds’ market.

• Flour EBIT edged down by 13.3% QoQ to RM34.0mil in 3QFY21. We attribute this to higher wheat costs. Flour EBIT margin eased to 5.6% in 3QFY21 from 6.9% in 2QFY21.

• Comparing 9MFY21 against 9MFY20, MFM swung into a core net profit of RM64.1mil from a net loss of RM11.9mil underpinned mainly by the de-consolidation of losses in the poultry division and lower interest expense.

• The flour division performed well in 9MFY21 as reflected in the 58.5% YoY surge in EBIT. Flour EBIT margin rose to 7.1% in 9MFY21 from 5.2% in 9MFY20. The flour division benefited from higher demand and selling prices in 1QFY21.

Source: AmInvest Research - 18 Nov 2021