Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with a lower fair value of RM1.00/share vs. RM1.20/share. We  reduce MFM’s net profit estimates by 25.3% for FY23E and  21.2% for FY24F to account for higher interest expenses.

• In spite of MFM’s weak 1QFY23 earnings, we remain  sanguine on the group’s prospects as flour profits are  expected to rebound on lower wheat costs. According to  Bloomberg, the price of soft red winter wheat has declined  by 22.2% from the beginning of the year to US$6.12/bushel  currently.

• Our fair value of RM1.00 implies a rolled-forward FY24F fully diluted PE of 10x from FY23E earlier. The PE of 10x is  the 2-year average for MFM. We attach a 3-star ESG rating  to MFM.

• MFM’s 1QFY23 results fell short of our earlier annualised  FY23F earnings by 20% as interest expense doubled and  flour earnings softened. Flour earnings tumbled by 54.6%  YoY to RM18.4mil in 1QFY23 dragged by higher costs of  wheat. Flour EBIT margin shrank to 2.3% in 1QFY23 from  6.5% in 1QFY22. 

• However, on a quarterly basis, flour EBIT improved by  34.2% to RM18.4mil in 1QFY23 as the bulk of the high-cost  wheat inventory had been used in 4QFY22. Flour EBIT  margin inched up to 2.3% in 1QFY23 from 1.7% in 4QFY22.

• MFM’s 51% share of poultry earnings surged to RM6.8mil  in 1QFY23 from a loss of RM4.2mil in 1QFY22. This was  driven by stronger selling prices, poultry subsidies and  rising demand. We reckon that the poultry plant in Lumut  is operating at a higher average utilisation rate of 50%  currently vs. 30% to 40% early last year. 

• Assuming a 100% shareholding, the poultry division  swung into a net profit of RM30.1mil in 1QFY23 from a loss  of RM9.8mil in 1QFY22. Revenue climbed by 32.3% to  RM306mil in 1QFY23 from RM231.2mil in 1QFY22.

• On a QoQ basis, however, share of poultry earnings  slumped by 82.9% to RM6.8mil in 1QFY23 in the absence  of tax incentives and write-back of provisions. Sales  volume was also lower QoQ in 1QFY23.

• MFM is currently trading at an attractive FY24F fully diluted  PE of 7.3x, which is lower than its 5-year average of 20x.   

Source: AmInvest Research - 19 May 2023