Investment Highlights

• We upgrade Malayan Flour Mills (MFM) to BUY from HOLD with a higher fair value of RM0.80/share vs. RM0.70/share previously. We have raised MFM’s FY24F net profit by 16% to account for stronger flour earnings. Our revised fair value is based on FY24F fully diluted P/E of 10x, which is the 2-year average. We ascribe a 3-star ESG rating to MFM.

• MFM’s annualised 9MFY23 net profit was 32.9% above our forecast as flour earnings rebounded in 3QFY23. We have revised MFM’s FY23E net profit upwards by 34% to account for this.

• MFM swung into net profit of RM24.2mil in 3QFY23 from net loss of RM2mil in 2QFY23. Flour EBIT improved to RM37mil in 3QFY23 from RM7.2mil in the previous quarter. The earnings turnaround can be attributed to a lower cost of wheat. MFM drew down all its high-cost wheat inventory in 2QFY23. Flour EBIT margin expanded to 4.9% in 3QFY23 from a mere 1% in 2QFY23.

• On a yearly basis, MFM’s net profit plunged by 66.7% to RM32.7mil in 9MFY23 dragged by lower flour earnings and losses in the Indonesian flour joint venture.

• Flour EBIT sank by 45.1% to RM62.6mil in 9MFY23 from RM114mil in 9MFY22 due to high cost of wheat and weaker demand in Vietnam. Flour EBIT margin shrank to 2.7% in 9MFY23 from 5.5% in 9MFY22.

• MFM’s share of losses in PT Bungasari were RM21.3mil in 9MFY23 in contrast to a positive RM1.5mil in 9MFY22. PT Bungasari was affected by stiff competition in Indonesia, which resulted in a drop in selling prices.

• Poultry division’s (based on 100% shareholding) net profit dipped slightly to RM55.1mil in 9MFY22 from RM56.5mil due to lower subsidy income. On a brighter note, poultry revenue rose by 7.8% YoY to RM870.1mil in 9MFY23 on the back of higher sales volume.

• MFM is currently trading at a FY24F fully diluted PE of 8x, which is below its 5-year average of 20x.

Source: AmInvest Research - 23 Nov 2023