Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with a higher fair value of RM1.20/share vs. RM1.00/share originally. We raise MFM’s FY23F net profit by 18% to account for a lower effective tax rate of 15% vs. 28% previously and a higher poultry EBIT margin resulting from increased selling prices.

• Our fair value of RM1.20 is based on a FY23F fully diluted PE of 10x, which is the 2-year average. We attach a neutral 3-star ESG rating to MFM.

• MFM’s FY22 net profit was 20% above our forecast due to strong poultry earnings and a decline in effective tax rate. MFM’s effective tax rate was 14.2% in FY22 vs. 37% in FY21 as the group recognised tax incentives and a lower tax rate in Vietnam.

• MFM has declared a final gross DPS of 1.5 sen, which brings FY22 total gross DPS to 3 sen, translating into a yield of 3.7%. We forecast a gross DPS of 3.2 sen for FY23F, which translates into a decent yield of 4%.

• Share of earnings in the poultry joint venture was RM77mil in FY22 compared to a loss of RM10.5mil in FY21. The poultry division (assuming a 100% shareholding) recorded a net profit of RM151mil in FY22 in contrast to a net loss of RM57.3mil in FY21.

• The poultry division benefited from poultry subsidies, higher demand, stronger selling prices and a tax credit of RM47.5mil in FY22. Utilisation rate of the poultry plant in Lumut rose to 60% in 4QFY22 from 30%-40% in FY21.

• We believe that poultry selling prices rose in FY22 as the division sold higher-value added poultry products, which are not subjected to price controls.

• A dampener was the flour division. Flour EBIT fell to RM127.7mil in FY22 from RM187mil in FY21 as higher costs of wheat, packaging and transportation eroded operating profit margin. EBIT margin slipped to 4.5% in FY22 from 7.8% in FY21.

• Comparing 4QFY22 against 3QFY22, flour EBIT slid by 66.2% to RM13.7mil. EBIT margin shrank to 1.7% in 4QFY22 from 5.2% in 3QFY22.

• MFM is currently trading at an attractive FY23F fully diluted PE of 7x, which is lower than its 5-year average of 20x and offers a decent dividend yield of 4%.

Source: AmInvest Research - 28 Feb 2023