Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with a lower fair value of RM1.00/share (vs. RM1.37/share previously). We have reduced MFM’s FY22F net profit by 19.0% to account for the squeeze in EBIT margin resulting from higher costs of wheat, corn and soybean.

• A silver lining is that the Malaysia government has offered subsidies of 60 sen/kg for live birds. The subsidy would help poultry producers and contract farmers cover the rising costs of soybean and corn. It would help ensure that there is sufficient supply of day old chicks in the industry.

• Our fair value of RM1.00/share is based on a fully diluted FY22F PE of 15.0x (vs. 18x previously). Due to regulatory risks in the poultry industry, we have reduced our PE assumption to 15.0x. We ascribe a three-star ESG rating to MFM instead of four stars as we reduce MFM’s rating for biosecurity measures to three stars due to the growing incidences of poultry diseases in the industry.

• MFM reported a net loss from continuing operations of RM27.7mil in 4QFY21. This was below our expectations. The net loss was mainly attributed to a fair value loss of RM77.9mil on contingent receivables. We believe that MFM made provisions as the poultry division may miss the FY22F EBITDA target of RM141.0mil.

• Excluding the fair value loss of RM77.9mil and profit from discontinued operations of RM51.7mil, MFM’s core net profit would have been RM50.1mil in 4QFY21. This would have exceeded our forecast.

• The flour division performed well in 4QFY21. EBIT of the flour division surged by 92.0% to RM65.2mil in 4QFY21 from RM34.0mil in 3QFY21. EBIT margin of the flour division rose to 9.5% in 4QFY21 from 5.6% in 3QFY21. We attribute the enhancement in EBIT margin to higher selling prices of pflour products.

• The poultry division recorded a net profit of RM32.3mil in 4QFY21 vs. a net loss of RM32.8mil in 3QFY21. The division recorded a smaller net loss of RM57.3mil in FY21 compared with RM88.4mil in FY20.

• The poultry division swung into the black in 4QFY21 on the back of a RM35.6mil fair value gain on biological assets. On the EBITDA level, we believe that the poultry division broke even. Revenue of the poultry division rose by 12.0% QoQ to RM684.3mil in 4QFY21.

• According to the Department of Veterinary Services (DVS), the average weekly price of ex-farm live bird was RM6.30/kg in 4QFY21 vs. RM5.21/kg in 3QFY21.

Source: AmInvest Research - 1 Mar 2022