Investment Highlights

• We maintain BUY on Malayan Flour Mills (M Flour) with an unchanged fair value of RM1.00/share. Our fair value is based on a fully diluted FY22F of 15x, with a neutral 3-star ESG rating.

• The fully diluted FY22F PE of 15x is close to M Flour’s average PE of 13x in the past 2 years. We think that M Flour should trade above its 2-year average as the group has deconsolidated its poultry losses and most of the earnings will come from the flour division going forward

• We believe that M Flour’s earnings would continue to be driven by the flour division in FY22F. Most of M Flour’s flour earnings are from Vietnam, which is not regulated. Hence, flour producers can increase selling prices to mitigate the rise in the cost of wheat.

• We forecast EBIT of the flour division to improve by 10.1% to RM206mil in FY22F. We have assumed flour EBIT margin to be 7.3% in FY22F vs. 7.8% in FY21. According to Bloomberg, average price of soft red winter wheat has climbed by 41.1% to US$9.07/bushel in 1QFY22 from US$6.43/bushel in 1QFY21.
• We reckon that the increase in the flour earnings would be enough to compensate for the share of losses in the poultry joint venture. We think that the poultry unit may be in the red in FY22F dragged by surging costs of feed meal. At the same time, poultry’s selling prices are capped at RM8.90/kg for standard chicken and RM6.50/kg for live birds. According to Bloomberg, the average price of US soybean increased by 35% to US$15.61/bushel in 1QFY22 from US$11.56/bushel in 1QFY21. Average price of US corn rose by 42.8% to US$6.71/bushel in 1QFY22 from US$4.70/bushel in 1QFY21.
• A silver lining is that M Flour’s poultry unit would be selling more products, which are not subjected to price caps. These include chicken parts. Recall that the ceiling price on poultry is only on whole birds. Currently, the group’s poultry processing plant in Lumut is operating at utilisation rates of 50% to 60% vs. 50% previously.

• The poultry industry in Malaysia is enjoying a recovery in demand currently as HORECA activities improve. On the flip side however, there is a supply shortage of about 30% due to insufficient workers, exit of some contract farmers due to the rising costs of production and a poultry disease in the southern region of Malaysia.

• M Flour’s valuations are undemanding at PEs of 9.6x for FY22F and 6.2x for FY23F vs its 2-year average of 13x. The group is expected to benefit from the recovery in flour and poultry demand.

Source: AmInvest Research - 18 Apr 2022