Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with an unchanged fair value of RM0.80/share, based on FY24F PE of 8x, which is the 2-year average. We ascribe a neutral 3- star ESG rating to MFM.

• MFM has declared a final gross DPS of 1.5 sen, which brings total gross DPS to 3 sen for FY23 (FY22: 3 sen). We forecast a gross DPS of 3.5 sen for FY24F, which implies a yield of 5.4%.

• MFM’s FY23 core net profit of RM64.4mil (ex-fair value loss of RM71.1mil on contingent receivable) was 28% above our expectations. The group exceeded our estimates as flour earnings were stronger-than-expected in 4QFY23.

• We believe that the fair value loss of RM71.1mil on contingent receivable came about as MFM’s poultry unit was unable to meet the net debt and EBITDA targets set by Tyson International.

• MFM’s core net profit declined by 55.6% to RM64.4mil in FY23 as share of earnings fell in the flour associate and poultry joint venture. PT Bungasari, which is 30%-owned by MFM recorded a larger net loss of RM66.5mil in FY23 vs. RM23.4mil in FY22 due to a drop in selling prices and increase in forex losses.

• The poultry division (assuming a 100% shareholding) recorded a smaller net profit of RM25.9mil in FY23 compared to RM151mil in FY22, dragged by lower sales volume and fair value losses on biological assets.

• EBIT of MFM’s flour division edged down by 1.9% to RM125.3mil in FY23 due to higher cost of wheat in 1H. EBIT margin slipped to 4.1% in FY23 from 4.5% in FY22.

• Comparing 4QFY23 against 3QFY23, MFM’s net profit improved by 31% to RM31.7mil as flour earnings recovered. Flour EBIT climbed by 69.5% QoQ to RM62.7mil in 4QFY23 on the back of lower cost of wheat. The high- cost wheat inventory had been fully utilised in 1HFY23. Flour EBIT margin rose to 8% in 4QFY23 from 4.9% in 3QFY23.

• MFM is currently trading at an undemanding FY24F PE of 7x, which is below its 5-year average of 20x.

Source: AmInvest Research - 1 Mar 2024