Investment Highlights

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

• We attended MFM’s analyst briefing yesterday. Here are the key takeaways:-

• MFM is hopeful that its Lumut poultry processing plant would achieve an average utilisation rate of 75% in FY23F vs. 54% currently. The increase in demand is expected to come from quick service restaurants such as KFC and manufacturers such as MacFood, which is owned by Tyson International. We are keeping our FY23F net profit of RM129mil for now, to be conservative.

• To achieve the utilisation rate of 75%, MFM has to be able to obtain supply of broilers from its contract farmers. So far, there are no supply issues. Also, MFM plans to expand its own breeder farms by 5 to 6 million birds per month by FY24F. Presently, 60% to 70% of MFM’s broilers are from contract farmers.

• MFM believes that it would be able to meet the poultry EBITDA guarantees of RM141mil for FY22E and RM173mil in FY23F. FY23F earnings growth is expected to be underpinned by higher sales volume and improved margins. Recall that the EBITDA guarantees were provided to Tyson International pursuant to the disposal of the 49% stake in the poultry division in FY21.

• MFM is planning to set up a further value-added processing plant for the poultry division. The new plant would produce products such as chicken nuggets. The cost of the plant has not been determined yet. The construction of the plant may take place in 2HFY23 and it would take 18 months for the plant to be completed. The plant would be located next to the existing poultry plant in Lumut.

• MFM received poultry subsidies of RM32mil from the government in 9MFY22. The subsidies were provided to poultry producers as the costs of soybean and corn went up during the Ukraine war in 1HFY22. Corn and soybean are used to make feedmeal for the chickens.

• Overall, we are positive on the earnings outlook for MFM. MFM is currently trading at a FY23F fully diluted PE of 8x, which is lower than its 2-year average of 24x.

Source: AmInvest Research - 8 Dec 2022