Investment Highlights

• We maintain BUY on Malayan Flour (MFM) with an unchanged fair value of RM1.37/share. Our fair value is based on a FY22F PE of 18x and a 3.0% premium for a four-star ESG rating.

• We believe that MFM’s poultry division would swing into the black in FY22F (9MFY21 pre-tax loss: RM93.2mil) underpinned by higher sales volume and selling prices. The poultry plant in Lumut is estimated to achieve an average utilisation rate of 60% to 70% in FY22F vs. 50% in FY21E. At an average utilisation rate of 50%, the plant is processing about 130,000 to 140,000 birds per day.

• MFM’s poultry sales volumes are expected to improve in FY22F on the back of higher demand from the quick service restaurants and modern trade segment (hypermarkets, etc). Also following the entry of Tyson International as the 49% shareholder of MFM in May 2021, MFM’s sales volume to Tyson is expected to increase in FY22F. Tyson is expected to account for more than a third of MSM’s poultry sales in FY22F.

• We believe that selling prices of poultry would remain high in 1QFY22 due to supply shortage and festive-driven demand. We understand that industry supply of poultry is unable to meet demand currently partly because a disease has affected the supply of day old chicks of some producers. MFM is not affected by the disease as it operates a closed house system.

• In addition, the high feed meal costs of corn and soymeal have affected the operations of the smaller farmers. To recap, the price control level of RM6.30/kg for live birds lasts until 31 December 2021. It is uncertain if the Malaysia government will extend the price control level beyond 31 December 2021. Overall, we forecast the poultry division to break-even at an EBIT of RM9.2mil in FY22F.

• In spite of the high wheat costs, we reckon that MFM’s flour division would continue to perform well supported by price increases and positive demand in Vietnam. The Covid-19 lockdown in Vietnam in 9MFY21 has not affected industry demand for flour and operations of MFM’s flour unit.

• The flour division in Malaysia is still profitable although we expect margin erosions arising from the high cost of wheat. We forecast MFM’s flour division to achieve an EBIT of RM164.3mil in FY22F, which is the same as FY21E.

Source: AmInvest Research - 21 Dec 2021