• Farm Fresh Berhad (FFB) is focusing on its business-to-business (B2B) market in line with the increase in its Ultra High Temperature (UHT) milk sales due to higher sales from HORECA.

• Consumer-Packaged Goods (CPG) ice cream launch anticipated in August 2024 amplified with further increase in production from the Taiping plant. FFB is tapping into the RM1bn chocolate-flavoured malt beverage market focusing on product quality.

• We revised our earnings forecast higher by 4%/2% for FY25F/FY26F after factoring in higher UHT sales driven by demand from HORECA and increased contributions from the ice cream division.

• Maintain BUY with a higher TP of RM1.75 (from RM1.68). Our valuation is based on a 30x PER pegged to FY25F EPS of 5.82 sen.

We remain positive on Farm Fresh Berhad's (FFB) strategic growth expansion. Below are some key highlights from The Edge Weekly (8-14 July, 2024) article on Farm Fresh and our views.

Higher Demand from HORECA

UHT commercial sales surged by 49% to 33.3mn litres in 4QFY24. A large portion of this increase is due to higher demand from HORECA which contributed approximately 30% to the Malaysia segment revenue, amounting to RM210.18mn in FY24. For instance, some of FFB’s coffee chain clients are Zus, Coffee Bean, and Tealive, while Shangri-la, Sunway, Marriott, Genting, and YTL are among FFB’s hotel clients. The demand for UHT milk increased due to its quality and price competitiveness. Compared to other dairy producers, FFB uses whole milk powder imported from Australia and New Zealand, as opposed to skimmed milk powder and vegetable oil, which gives FFB an advantage, especially with coffee chains. To further soften logistics costs and broaden their sales channel, FFB plans to expand their stock keeping unit (SKU) for HORECA by launching a 9g butter by 3QFY24. This will enable FFB to supply fresh milk, UHT milk, butter, yogurt, and whipping cream instead of supplying only a few products to various locations.

Scream for Ice Cream

After acquiring 65% of Inside Scoop and 70% of Sin Wah, FFB is leveraging their expertise to launch their own consumer-packaged goods (CPG) ice cream, expected in early August 2024. The production capacity at the Taiping plant has been increased from 70k to 320k pieces per day, with a target utilization rate of 78% by October 2024. Additionally, as part of FFB's strategy to establish a new manufacturing hub in Enstek, 720k pieces of CPG ice cream are expected to be produced with a target commencing in 2025. Management guided that FFB will utilise the established distribution system of Sin Wah to distribute the CPG ice cream. Currently, Sin Wah has access surpassing 6k freezer drop-off points whereby FFB managed to increase it by another 2k with the final target of 10k drop-off points. On the other hand, since acquiring Inside Scoop, FFB has swiftly opened 8 new outlets in less than a year and aims to continue expanding at a rate of approximately 1 outlet per month in FY25. To recap, the ice cream division has already contributed to 6% of FFB’s revenue in FY24 and is anticipated to reach 10% in FY25 and 15% onwards.

New Product in New Market

In addition to the CPG ice cream and butter, FFB plans to launch its own chocolateflavoured malt beverage in both powder and UHT formats, which is anticipated to be available in stores by July 2024. Emphasizing their commitment to quality, the chocolateflavoured malt beverage will feature minimal sugar and fat, replaced with higher protein and fiber content. While this adjustment could narrow the margins, FFB's market research estimates the market size at RM1bn, with 81% of FFB’s respondents favouring FFB’s chocolate malt drinks. This presents a strategic opportunity for FFB to enter and capture market share, especially amidst ongoing consumer boycotts of competitors' products. However, potential challenges to this product launch include existing brand loyalty to competitors and the volatility of cocoa prices, which could further impact the product's profitability.

Our View

We remain positive on FFB’s development due to its strategic business plan, which focuses on gaining market share and brand loyalty by emphasizing product quality rather than sacrificing quality for higher margins. Additionally, we uphold a positive view on FFB’s upcoming product launches, which utilize existing expertise and cater to highdemand markets. These include: i) CPG ice cream which leverages the expertise of Inside Scoop and Sin Wah, ii) 9g and 20g butter to capture both retail and HORECA markets, and iii) tapping into the large market available for chocolate-flavoured malt beverage. FFB is also planning to enter the Philippines market by opening a processing facility, capitalizing on the lack of domestic production as the country imports 99% of its dairy demand. In East Malaysia, FFB plans to ramp up its supply of UHT and powder formats by acquiring a larger distributor, in line with the UHT division's larger revenue contribution in FY24. We believe these strategies support FFB's long-term positive earnings growth trajectory.

Earnings Revision

We have adjusted our earnings assumptions upwards for FY25F and FY26F by 4% and 2%, respectively. This is to factor in i) higher sales from UHT, driven by demand from HORECA, and ii) increased contribution from the ice cream division, following the expansion of Taiping production capacity to 320k pieces per day with an expected utilisation rate of at least 78% for FY25F.

Maintain BUY call with a higher TP of RM1.75

In tandem with our revised earnings, we raised our TP to RM1.75 (from RM1.68) and maintain our BUY call recommendation. Our valuation is based on unchanged PER 30x (2-years weighted average some of global peers) pegged at FY25F EPS of 5.82 sen.

Source: BIMB Securities Research - 8 Jul 2024