Investment Highlights

• We downgrade Malayan Flour Mills (MFM) to HOLD from BUY with a lower fair value of RM0.76/share vs. RM1.00/share previously. We have reduced MFM’s FY23E net profit by 30% and FY24F net earnings by 27% to account for lower contribution from the poultry and flour divisions.

• MFM’s poultry division is suffering from low production volumes currently as there is a shortage of broilers from contract farmers. Also, demand for marinated birds from a quick service restaurant was weak in 1QFY23. As for the flour division, earnings are expected to recover from 3QFY23 onwards as the inventory of high cost wheat would be fully utilised in 2QFY23.

• Our fair value of RM0.76/share for MFM is based on a FY24F fully diluted PE of 10x, which is the 2-year average. We ascribe a 3-star ESG rating to MFM.

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

• The poultry plant in Lumut operated at an average utilisation rate of 51% in 1QFY23 vs. 42% in 1QFY22. This is below the targeted utilisation rate of 75% for FY23E. Hatchability of birds has been poor in the poultry industry due to the genetic make-up of the birds, which favour meat yields at the expense of hatchability. This has affected the supply of broilers from the contract farmers. MFM hopes to resolve the issue soon.

• MFM reckons that there is a 20% supply shortage in the poultry industry. At the same time however, demand for poultry products is expected to be resilient as consumers are switching to chicken from pork. The African swine fever has affected the supply of pork in Malaysia.

• In Vietnam, the weak economy and inflationary fears have affected demand for flour products. MFM’s sales volume dropped by 11.3% YoY in Vietnam in 1QFY23. In spite of this, we reckon that lower wheat costs would support operating profit margins and earnings going forward. Recall that MFM’s flour EBIT sank by 54.6% YoY to RM18.4mil in 1QFY23 due to high wheat costs.

• MFM is currently trading at a FY24F fully diluted PE of 9x, which is marginally lower than its 2-year average of 10x.

Source: AmInvest Research - 14 Jun 2023