• Expanding Inventory Levels to Cater to Growing Demand From the Sourcing and Distribution Business.
   
• Organic Growth of the Food Additives Segment Which Rake in Higher Profit Margin.
   
• Expansion of a new regional storage facility and support team to overcome utilization limits and improve operational efficiencies.

• We expect core net profit to be at RM8.2m (+21.0%) & RM9.4m (+14.1%) for FY24- 25f, as the revenue from the food additive segment should expand the profit, coupled with the stocking up of inventory which will see slight improvement in margins.

• We derived a fair value of RM0.645 for ACSH. Our fair value of RM0.645 (upside of 29% against IPO price of RM0.50) is derived by pegging a P/E of 14x to the FY25f EPS of 4.6 sen. We believe a forward P/E of 14x is justified despite it is at a premium towards the 2FY forward P/E of selected peer, PPB Group Berhad of 12x, as we believe the exponential growth from the food additive segment justifies the P/E ratio given.

Investment Highlights

Expanding inventory levels to cater for growing demand from the sourcing and distribution business. From FY20 to FY23, the revenue generated from the sourcing and distribution business recorded a CAGR of 11.4% from RM86.6m to RM119.8m. Pursuant to the utilization of IPO proceeds, Agricore CS Holdings Bhd (ACSH) plans to use a part of the funds raised to increase inventory. The increased in inventory allows them to increase sales through the ability to offer products in larger quantities on an immediate basis to meet the surge in demand. The higher inventory levels also help ACSH to weather through low supply periods during non-harvest seasons, as well as to mitigate sudden price fluctuations, that may impact profit margins.

Organic growth of the food additives segment which commands a higher profit margin. ACSH has shown its strength in R&D initiatives through the growing number of formulations of new food additives from FY20 to LPD. From FY20 to FY23, the growth in the food additive and fried shallots segment has grown from RM2.4m to RM15.2m respectively, on the back of increasing demand for its food additives. Going forward, we believe ACSH’s R&D capabilities will continue to strengthen by introducing more new SKUs, which coupled with its ability to command a higher margin as compared to the sourcing and distribution segment, will contribute positively to its top- and bottom-line going forward.

Expansion of a new regional storage facility and support team to overcome utilization limits and improve operational efficiencies. Utilisation at the Bukit Minyak Premises stood at an average of 91.1%, which limits the storage capabilities required for the aforementioned stocking up of inventory. Therefore, the new planned 30,000 sqft storage facility will not only fix some of its utilization issues, but also allows shorter delivery times to central and southern customers for selected products which improves operational efficiencies. Furthermore, the intended hiring of new support team members will improve the output of various departments within the company, which coupled with the operational benefits from the new storage facility will enable ACSH to increase sales, while reducing costs going forward.

Company Background

ACSH’s history traces back to 2009 with the sourcing and distribution of plant-based agricultural food ingredients including starch products, beans and pulses and grain products under our house brands “POKOK AGRICORE” and “SunRise” as well as third party brands. In 2015, ACSH expanded product offerings to include fried shallots under house brand ‘CAP POKOK’.

In 2020, ACSH ventured into the production of food additives by developing formulations for food additives. By 2021, ACSH has successfully formulated 18 formulations and as of LPD ACSH has commercialised 37 out of 50 formulations. Over the years, ACSH has expanded their sourcing network by working with suppliers from various countries eg. Myanmar, USA, Germany and etc. Furthermore, ACSH has expanded from a 5,000 sqft premise in 2009 to over an aggregate of 60,000 sqft of operational premises.

Business Segments

1. Sourcing and distribution of plant-based agricultural food ingredients (88.8% of Revenue)

ACSH sources and distributes plant-based agricultural food ingredients, mainly starch products, beans and pulses, grain products and other related products. The products are used as input for manufacturing food products such as noodles, pastries, snacks etc. Furthermore, they are also used as raw material for food products, additives and food preparation such as soups, sauces and gravies, noodles etc.

ACSH identifies suppliers, purchases the products, stores the purchased products in ACSH’s warehouse and delivers the products to customers once an order is received. The products are tested to ensure that they meet ACSH’s specifications and quality standards. The products are readily packed by the suppliers into different sizes under house brands “POKOK AGRICORE”, “SunRise” and “Cap Pokok”.

2. Production and sale of food additives and fried shallots (11.2% of Revenue)

ACSH also produces in-house food additives and are supplied to food manufacturers under its in-house brand “BAPAS”. The products are produced through in-house R&D formulations to achieve the desired characteristics. The food additives are produced using raw materials such as starch products and phosphate, and are used as thickening agents, anti-caking agents etc.

ACSH also produces and sells fried shallots under in-house brand “CAP POKOK” and services 3rd party brands that engage ACSH to be a contract manufacturer for fried shallots.

Distribution channels and customers

ACSH adopts a multi-channel distribution strategy comprising of in-house sales and marketing team, retailers and wholesalers which provides a broad distribution network to reach a diverse customer base. Products are sold in various packaging sizes from consumer-sized packaging (80g to 30kg) to business-sized packaging (10kg to 900kg). Customers range from business end-users and retail end-users, e.g supermarkets, hypermarkets, as well as directly to retailers.

Financials

In FY23, ACSH’s net profit drop -4.7% YoY to RM6.8m despite a topline improvement to RM135.0m (+10.0% YoY). The revenue increase is in line with the increase in sourcing and distribution segment, the food additives and fried shallots segment. However, the margins were dragged by the weak ringgit to USD, causing the increase in cost of sales.

For FY24f, we project the topline to see further improvement to RM151.5m (+12.2% YoY), supported by the planned increase in ability to meet customer demand through the stocking up of inventories, in line with the expansion plan and increased R&D in the food additive segment. Meanwhile, we expect core net profit to grow to RM8.2m (+21.0%) & RM9.4m (+14.1%) for FY24-25f, as the revenue from the food additive segment should expand the profit, coupled with the stocking up of inventory which will see slight improvement in margins.

Valuations

We derived a fair value of RM0.645 for ACSH. Our fair value of RM0.645 (upside of 29% against IPO price of RM0.50) is derived by pegging a P/E of 14x to the FY25f EPS of 4.6 sen. We believe a forward P/E of 14x is justified despite it is at a premium towards the 2FY forward P/E of selected peer, PPB Group Berhad of 12x, as we believe the exponential growth from the food additive segment justifies the P/E ratio given.

Investment risks

Exposed to foreign exchange fluctuations. ACSH has suppliers which are transacted in USD and ACSH and may be unable to pass on increased costs to its customers, therefore a weakening ringgit may affect profit margins.

Strong competition from other industry players. The food ingredients industry in Malaysia is competitive and fragmented with a large number of industry players. The barrier of entry of the industry is low and if ACSH is unable to keep up with the industry demand they may lose market share to the competitors.

Fluctuations in raw material prices. As a large proportion of supplies are subject to global supply and demand conditions, geopolitics etc. Therefore, the inability to pass on costs of sales to customers may affect its profit margins.

Dependent on Key senior management. Discontinuation of service of the key senior management may disrupt key decision making within ACSH’s business operations.

Source: Mplus Research - 7 Jun 2024