Farm Fresh Berhad (FFB) 12MFY23 net profit of RM50mn (-37.4% YoY) was below our and consensus’ estimates at 87.2% and 73.8% respectively. The variance from our expectations was primarily due to higher input costs, such as dairy-related raw materials, labor expenses, farming costs, and elevated energy expenses. Notwithstanding that, FFB’s outlook is expected to remain resilient for the upcoming quarters, as reaffirmed by management. Maintain FFB as a BUY with unchanged TP of RM1.80. Our TP is based on an average of CY23 PER of domestic dairy-based companies under coverage or 31.2x, that is pegged to FY24F EPS of 5.7 sen.

• Below expectations. 12MFY23 net profit of RM50mn (-37.4% YoY) was below our and consensus’ estimates at 87.2% and 73.8% respectively. The variance from our expectations was primarily due to an increase in input costs, such as dairy-related raw materials, labor expenses, farming costs, and elevated energy expenses.

• Dividend. No dividend was declared in 4QFY23.

• QoQ. FFB’s 4Q23 revenue decreased slightly or by 0.5% QoQ. However, its EBITDA and EBITDA margin dropped at bigger traction or by 51.1% QoQ no thanks to higher dairy-related raw materials, and lower production volume from Australia operation. Net profit also fell lower or by 73.9% to RM5mn due to FV losses on biological assets, provision of ESOS, higher labor expenses, annual fee payment to UPM for Collaboration Agreement and weakening of Ringgit.

• YoY/ YTD. Cumulatively, 12MFY23 revenue surged or by 25.5% to RM630mn thanks to the improvement in sales volume on product related to school milk programme, RTD milk products and new products launching (October 2022: Growing Up Milk, Dairy Whipping Cream UHT, Farm Fresh Organic Milk, November 2022: Farra by Farm Fresh). This was coupled with higher external sales from Australian operations. Net profit dropped however or by 37.4% impacted by similar reasons in QoQ comparison.

• Outlook. FFB’s outlook is expected to remain resilient for upcoming quarters, as reaffirmed by management. Key growth drivers may come from i) the implementation of a 5% price increase for chilled RTD and selected UHT products in mid-July 2023, ii) ongoing launch of new products to expand market share, iii) upcoming commencement of operations at the new processing line in Taiping starting June 2023, iv) entry into a new export market, the Philippines, with a focus on chilled products initially, v) completion of the acquisition of TISSB, which will enhance product variety, expected to be finalized in the near term (by the end of May 2023) and vi) normalisation in cost in 2H.

• Our call. Maintain FFB as a BUY with unchanged TP of RM1.80. Our TP is based on an average of CY23 PER of domestic dairy-based companies under coverage or 31.2x, that is pegged to FY24F EPS of 5.7 sen.

Source: BIMB Securities Research - 31 May 2023