KUALA LUMPUR (July 20): Maybank Investment Bank Bhd has cut its target price for dairy products maker Farm Fresh Bhd to RM1.20, down 40 sen or 25% from RM1.60 prior, after lowering the price-earnings ratio (PER) of the consumer sector to 24 times, from 26 times.

This represents a 10 sen, or a 9.09% premium to its share price of RM1.10 at the time of writing, which gives the counter a market capitalisation of RM1.10.

“Cost challenges are expected to persist in the near term but stable product demand, product price hikes and softening raw material costs in 2HFY2024 (first six months ended Sept 30, 2023) should drive stronger earnings h-o-h (half-on-half),” said analyst Jade Tam in a note on Thursday (July 20).

According to her, Farm Fresh plans to mitigate the ongoing issue of high Australian farmgate average selling prices (ASPs) by reducing its reliance on raw milk from third party farmers.

It aims to achieve this by increasing its upstream milk output and increasing its internal to external milk sourcing ratio to 69:31, from 48:51 in FY2023.

“Easing whole milk powder ASP also offers an additional avenue of earnings support once the group rolls over into a lower inventory cost cycle,” she said, adding that the group has hedged its whole milk powder ASPs at around US$3,240 per metric tonne from June until October 2023, which reflects cost savings of around 15% from its current average whole milk powder ASP of US$3,800 per metric tonne.

For context, whole milk powder accounts for about 49% of Farm Fresh’s total milk requirement in FY2023, up from 38% in FY2023, said Tam.

She lowered Farm Fresh’s earnings estimates for the financial year ended March 31, 2024 (FY2024) and FY2025 by 11% to 21%, but maintained FY2026 projections due to its current raw milk cost structure.

“We expect Farm Fresh’s 1HFY2024 earnings to be weak, with the bulk of whole milk powder cost savings coming through in 2HFY2024.

“Farm Fresh’s new product pipeline and regional expansion into the Philippines is on track, as it targets to commission its processing plant in August 2023. The group plans to launch its powdered growing up milk variant in October 2023 and introduce its ice cream product for the domestic consumer-packaged goods segment in January 2024.

The counter has trended lower of late, falling to its lowest closing price of RM1.05 on July 12, amid concerns over stiff competition for raw milk.