Investment Highlights

• We affirm BUY on Malayan Flour Mills (MFM) with an unchanged fair value of RM1.00/share. Our fair value of RM1.00 implies an undemanding FY23F fully diluted PE of 10x. We ascribe a 3-star ESG rating to MFM.

• MFM’s annualised 1HFY22 net profit was 15% above our forecast as the earnings turnaround in the poultry joint venture was stronger than expected. Hence, we raise MFM’s FY22E net profit by 13.1% to account for a higher EBIT margin in the poultry joint venture.

• MFM’s poultry division (assuming a 100% shareholding) finally swung into the black after being in the red since FY18. The poultry unit recorded a net profit of RM28.5mil in 2QFY22 vs. a net loss of RM9.8mil in 1QFY22.

• The earnings turnaround in the poultry unit in 2QFY22 was supported by a higher utilisation rate of 60% at the plant in Lumut (vs. 50% previously) and poultry subsidies. Revenue of the poultry division rose by 21.8% YoY to RM497.4mil in 1HFY22. Net profit was RM18.7mil in 1HFY22 vs. a net loss of RM60.5mil in 1HFY21.

• Apart from improved performance from the poultry joint venture, MFM’s net profit was supported by a low effective tax rate of 13.1% in 2QFY22 (1QFY22: 22.3%). MFM’s effective tax rate declined to 17.2% in 1HFY22 from 20.1% in 1HFY21 due to tax incentives and lower tax rates in Vietnam.

• As for the flour division, EBIT declined by 16.3% to RM73.5mil in 1HFY22 from RM87.8mil in 1HFY21 dragged by higher costs of wheat and logistics. Flour EBIT margin slid to 5.8% in 1HFY22 from 8% in 1HFY21.

• Although MFM raised the selling prices of its flour products in Malaysia and Vietnam, we believe that this was not enough to mitigate the higher cost of production. MFM’s flour revenue climbed by 16.8% YoY to RM1.3bil in 1HFY22.

• Comparing 2QFY22 against 1QFY22, flour EBIT slipped by 18.1% QoQ to RM33.1mil in 2QFY22 as the higher costs of wheat and logistics eroded EBIT margin to 5.1% in 2QFY22 from 6.5% in 1QFY22.

Source: AmInvest Research - 26 Aug 2022