• We like Farm Fresh due to its priority on quality, health and constant expansion of its business and product portfolio, leveraging on skills and expertise of its subsidiaries.

• The upcoming launch of consumer-packaged goods (CPG) ice cream line and the new Philippines processing facility are anticipated to boost FFB’s earnings.

• We resume coverage on FFB with a BUY recommendation at TP of RM1.68, based on FY25F EPS of 5.6 sen pegged at the 2-years weighted average of some global peers’ PER of 30x.

Rapid Expansion Over the Years

Farm Fresh Berhad (FFB) has significantly expanded its product portfolio across various segments. Key revenue drivers for FFB include the chilled and UHT segments, particularly following its participation in the School Milk Program, which has significantly boosted sales in the UHT segment. FFB maintains a competitive edge in the chilled and UHT sections by using fresh milk. Recently, FFB introduced Yarra by Farm Fresh, a product line utilizing whole milk powder (WMP) as raw material to enhance its competitive pricing against peers. Despite this, FFB maintains the quality of its milk, distinguishing itself from competitors who often opt for skimmed-milk powder as raw material.

New Product Line, New Processing Facility, New Market

As part of its aggressive expansion strategy, FFB is set to introduce a new product line i.e., CPG ice cream, following its recent acquisitions of two prominent ice cream businesses, Inside Scoop and Sin Wah Potong Ice Cream. These acquisitions are intended to leverage the expertise, quality, brand equity, and distribution systems of the acquired companies to further diversify FFB’s product portfolio. The launch of the CPG ice cream is scheduled for June 2024, utilizing the Enstek processing facility, which has the capacity to produce up to 720k pcs per day. Moreover, FFB anticipates commencing operations at its processing facility in the Philippines in May 2024, capitalizing on the high demand for fresh milk in the country, where 99% of milk requirements are currently met through imports.

Improvement in Margin

We anticipate that the margin will improve due to the higher revenue contributed from the new product lines, lower input cost expected from the ease in whole milk powder prices and expected decrease in Australian farmgate prices as well as the long-term contribution from the ice-cream line. We expect EBITDA margin to improve by 3ppts YoY to 19% in FY25F.

BUY call with TP of RM1.68

We revisit our forecast and have lower down our FY24F/ FY25F earnings by - 43%/ -12% after factoring in higher operating costs than previously estimated and higher depreciation costs due to these new acquisitions of subsidiaries. We resume coverage on FFB with a BUY recommendation at TP of RM1.68. Our valuation is based on PER 30x (2-years weighted average some of global peers) pegged at FY25F EPS of 5.60 sen.

Source: BIMB Securities Research - 29 Apr 2024