Investment Highlights

• We maintain BUY on Malayan Flour Mills (M Flour) with an unchanged fair value of RM0.80/share, based on FY25F PE of 8x, which is the 2-year average. We ascribe a neutral 3- star ESG rating to M Flour.

• Although M Flour’s poultry earnings are expected to be poor in FY24F, this would be more than compensated by a recovery in flour profits.

• Even so, we have reduced M Flour’s FY24F net profit by 5% to account for weaker contribution from the poultry joint venture. We forecast M Flour’s share of earnings in the unit to be a loss of RM12mil in FY24F vs. a positive RM25.9mil in FY23 due to a drop in poultry demand from quick service restaurants.

• Here are the key takeaways from M Flour’s analyst briefing yesterday: -
  
  ➢ We believe that M Flour’s flour division would perform well in FY24F on the back of higher sales volume and a drop in the cost of wheat. We forecast flour EBIT to climb by 41% to RM176.9mil in FY24F from RM125.3mil in FY23.
  
  ➢ Due to strong demand for flour, M Flour will be installing a new RM30mil production line in Lumut, Perak. The new line will command a milling capacity of 600 tonnes per day and is expected to be completed at the end of FY24F. The group may also expand its flour mill in north Vietnam as it is operating close to 100%.
  
  ➢ M Flour’s Malaysian flour division recorded a 12% increase in sales volume in FY23 while in Vietnam, sales volume rose by 5.2%. Average utilisation rates were 67% in Malaysia and 72% in Vietnam in FY23.
  
  ➢ In Indonesia, we believe that 30%-owned PT Bungasari would record smaller losses in FY24F. Although price competition is expected to be intense, this would be mitigated by lower cost of wheat. We estimate M Flour’s share of net loss in PT Bungasari at RM15mil in FY24F vs. RM19.9mil in FY23.
  
  ➢ Demand for poultry products is anticipated to remain poor in FY24F due to the boycott of certain quick service restaurants. To cushion this, M Flour’s poultry joint venture would be selling more live bird products and focusing on other quick service restaurants and retailers.

• M Flour is currently trading at an undemanding FY24F PE of 8.5x, which is below its 5-year average of 10x.

Source: AmInvest Research - 19 Mar 2024