3QFY24 net profit of RM20.4m brought 9MFY24 net profit to RM39.6m (-17% yoy), at 47%/61% of our/Bloomberg consensus FY24F estimates.
We believe the rebound in its gross margin in 3QFY24 will sustain through to FY25F and support a >RM100m net profit in FY25F.
Maintain Hold, with a GGM-based target price of RM1.37, implying a FY25F P/E of 22.2x.
Margin rebound continues on higher revenues and lower costs
Farm Fresh’s (FFB) 3QFY3/24 net profit of RM20.4m (+60% qoq) brought 9MFY24 net profit to RM39.6m (-17% yoy). Revenues expanded 7% qoq in 3Q on the back of a 4% qoq increase in volumes to 27.6m litres and a 2% qoq increase in average sellling prices.
Also helping revenue expansion in 3QFY24 was the addition of Sin Wah Ice Cream’s (70% stake) revenues for two months. Farm Fresh’s gross margin improved 2.2% pts qoq to 28.5% in 3QFY24. This was fuelled by the price increases instituted in July 2023 as well as lower raw material costs, especially whole milk powder prices (-14% qoq).
Takeaways from its 3QFY24 results call today (28 Feb)
Management has secured whole milk powder (WMP) supplies up to Jun 2024 at an average price of RM3,169/mt, and hedged FFB’s US$ requirements up to end-Mar 2024 at c.RM4.54/US$. While WMP prices averaged c.RM3,500/mt in Feb 2024, management sees these prices as more normal than the >RM4,000/mt levels in 1H2022 which impacted FY23 costs, and is happy to hedge positions at or below these levels. Management feels the biggest risk from a cost perspective would be a sharply weaker ringgit. It felt that at the current RM/US$ level of RM4.75-4.80, FY25F gross margin would be impacted by 0.4-0.5%.
Heightened delivery needed to rerate further
We maintain our Hold call on Farm Fresh. Our GGM-based target price of RM1.37 has factored in a sustainable ROE of 16.5% (FY26F: 16.4%) vs. our FY24F ROE forecast of 12.6%. We see its current valuation of 22x CY22F P/E as fair vs. its closest peer Fraser & Neave’s 21x. An acceleration in margin recovery and revenue growth are potential re-rating catalysts and upside risks to our Hold call. Failure to sustain the current net profit momentum would be a key downside risk.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....