We came away from a visit to Rhone Ma Holdings’ (Rhone Ma) dairy and livestock farming facility feeling positive of its long-term prospects in the farming industry. The facility is located in Batang Kali, Selangor, measuring 6 acres that houses 300 cattle including Holstein A2A2 cows from Australia. The group has diversified into dairy farming following its investment in Nor Livestock Farm since February 2020. It is now seeking to expand its dairy business with a potential land acquisition of more than 100 acres, aiming to increase the herd size from 300 cattle to more than 1,000 cattle. As the Malaysian government is working towards increasing the country’s self-sufficiency level in fresh milk production from 62% to 100% by 2025, we believe Rhone Ma’s plan to grow its dairy farming business should translate to higher earnings growth beyond FY25F. We maintain our Outperform call on Rhone Ma, with an unchanged TP RM0.88.

• Milk processing business to fit in the missing piece. The group currently does not process milk that is being produced at its Batang Kali facility but is sold to wholesalers due to the absence of a milk processing plant. However, by 1QFY23, the group would be able to sell processed milk to consumers with the commissioning of its milk processing plant in Kapar, Selangor. Raw milk produced from its Batang Kali facility is predominantly the higher quality A2 milk that helps to prevent symptoms of lactose intolerance. The group decided to switch away from cross breed to importing pure breed Holstein cows (that able to produce A2 milk) due to higher milk yield of an additional 50%.

• New land acquisition to further expand dairy business. To further grow its dairy business, the group is seeking to acquire another piece of land (more than 100 acres) to expand its herd size. The herd size is expected to reach 500 cattle by end of FY23F from the current 300 cattle and coupled with the new land acquisition, the group aims to reach more than 1000 cattle. However, we note that earnings contribution from dairy business remains muted for now given the gestation period and lack of economies of scale but we believe that the dairy business will start to contribute meaningfully to the group from FY25F onwards.

• Near term earnings outlook. In the recent 2QFY22 results, earnings increased 1.3% QoQ but dropped 12.6% QoQ due to rising production costs which compressed the EBIT margin to 10.5% from 11.4%. Nevertheless, the result in 1HFY22 was in line within our expectation. Over the next 2-3 years, end-to-end animal health solution will remain the largest contributor, accounting for c.80% of group’s revenue. With a growing pet population in Malaysia as well as owners’ greater willingness to spend on pets’ well-being, we believe demand for animal health solution will continue to grow. Meanwhile, Rhone Ma’s milk processing business could be the next key growth area in the longer run. We do not expect any material contribution in the near term as it should take time for Rhone Ma to penetrate and gain higher market share in the competitive dairy farming industry. Having said that, we believe the group will succeed given its experience in animal health and food ingredient supply that should complement its new A2 milk farming and distribution business.

Source: PublicInvest Research - 27 Sept 2022