Investment Highlights

• We maintain HOLD on Malayan Flour Mills (MFM) with a lower fair value of RM0.70/share (vs. RM0.76/share previously) due to MFM’s FY24F net profit being reduced by 9% to account for a weaker share of net profit in joint ventures. Our revised fair value is based on FY24F fully diluted PE of 10x, which is the 2- year average. We ascribe a 3-star ESG rating to MFM.

• MFM’s annualised 1HFY23 net profit was 50% below our forecast. The group’s results fell short of our expectations due to a plunge in flour earnings and losses in the flour joint venture in Indonesia. We have cut MFM’s FY23E net profit by 53% to account for these.

• MFM’s net profit fell by 83.7% YoY to RM8.5mil in 1HFY23 due to a 65.2% drop in flour EBIT and losses in the Indonesian flour joint venture. MFM’s share of losses in the PT Bungasari were RM17.3mil in 1HFY23 in contrast to a net profit of RM1.6mil in 1HFY22. On a positive note, MFM’s 51% share of poultry earnings rose to RM21mil in 1HFY23 from RM11.2mil in 1HFY22 as selling prices, poultry subsidies and sales volume increased.

• Based on a 100% shareholding, the poultry division recorded a larger net profit of RM41.1mil in 1HFY23 vs. RM18.7mil in 1HFY22. Revenue grew by 18.6% YoY to RM589.9mil in 1HFY23.

• MFM’s flour division was hit by the high cost of wheat in 1HFY23. Flour EBIT margin slid to 1.6% in 1HFY23 from 5.8% in 1HFY22.

• The wheat were purchased last year when prices were skyrocketing. We believe that flour EBIT would recover in 2HFY23 as MFM has fully drawn down its inventory of highcost wheat. Going forward, the cost of feedstock would also decline as wheat prices have now fallen.

• Comparing 2QFY23 against 1QFY23, MFM swung into a net loss of RM2mil from a net profit of RM15.5mil as flour and poultry earnings fell.

• Flour EBIT dived by 60.7% QoQ to RM7.2mil in 2QFY23. EBIT margin shrank to 1% in 2QFY23 from 2.3% in 1QFY23. We believe that MFM used the bulk of its high-cost wheat in 2QFY23.

• Share of poultry earnings slid to RM5.6mil in 2QFY23 from RM14.3mil in 1QFY23. We reckon that the volume of poultry production dropped in 2QFY23 as MFM did not receive sufficient broilers from contract farmers.

• MFM is currently trading at a FY24F fully diluted PE of 9x, at a discount to its 2-year average of 10x. We believe that the discount is justified due to MSM’s inconsistent earnings.

Source: AmInvest Research - 1 Sept 2023