Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with an unchanged fair value of RM1.00/share, based on a FY23F fully diluted PE of 10x. We attach a 3-star ESG rating to MFM.

• MFM’s annualised 9MFY22 net profit was 25% above our forecast due to stronger-than-expected earnings from its poultry joint venture. We raise MFM’s FY22E net profit by 25% to account for higher selling price and EBIT margin in the poultry joint venture.
• MFM’s core net profit surged by 53% YoY to RM98mil in 9MFY22 as the poultry joint venture swung into profitability. MSM’s effective tax rate was also lower at 14.4% in 9MFY22 vs. 24.1% in 9MFY21 due to tax incentives and lower tax rates in Vietnam.
• MFM’s poultry division (assuming a 100% shareholding) recorded a net profit of RM57mil in 9MFY22 vs. a net loss of RM93mil in 9MFY21.

• Poultry revenue climbed by 36% YoY to RM807mil in 9MFY22 on the back of better sales mix, poultry subsidies and higher sales volumes. We believe that more than half of MFM’s poultry products are high -alue-added items, which are not subjected to price controls.

• The earnings turnaround of the poultry division was also supported by a higher utilisation rate of 60% at the Lumut plant vs. 50% previously. The division received subsidies in 9MFY22 to compensate for higher costs of feed meal. On a quarterly basis, the poultry division recorded a larger net profit of RM38mil in 3QFY22 compared with RM29mil in 2QFY22.

• Flour EBIT slid by 6% to RM114mil in 9MFY22 from RM122mil in 9MFY21 as higher wheat costs eroded operating profit margin. EBIT margin of the flour division slipped to 5.5% in 9MFY22 from 7.1% in 9MFY21.

• Comparing 3QFY22 against 2QFY22, however, flour EBIT increased by 22% to RM41mil. EBIT margin inched up to 5.2% in 3QFY22 from 5.1% in 2QFY22. We attribute the QoQ improvement in flour earnings in 3QFY22 to higher selling prices, which compensated for the increase in wheat cost.

• MFM is currently trading at a compelling FY23F fully diluted PE of 6x, which is lower than its 2-year average of 24x.

Source: AmInvest Research - 22 Nov 2022