We believe MFM’s earnings will bottom in FY18 and recover to RM59.4m and RM62.0m in FY19-20, underpinned by (i) improved broiler production performance (as the issue has already been rectified since end-1H18), (ii) higher production capacity at downstream processing sub-segment, which carries better profitability via-s-vis live birds, (iii) turnaround at 30%-owned JV as price competition has eased since 3Q18, and (iv) higher aqua feed sales volume. We derive a fair value of RM0.72 on MFM by using sum-of-parts valuation. We value MFM’s (i) flour and grains segment at 12x FY19 core net profit, and (ii) poultry integration segment at 10x FY19 core net profit.

Company background. Malayan Flour Mills (MFM) is involved in 2 major businesses, namely (i) flour and grains trading businesses in Malaysia, Vietnam and Indonesia, and (ii) integrated poultry business in Malaysia.

Expanding integrated poultry segment footprint in Malaysia. MFM has been embarking on major expansion plan on its poultry integration segment with a total investment sum of at least RM550m since FY17. The expansion plan includes (i) capacity expansion at the broiler segment (pending approvals from relevant authorities), (ii) capacity expansion at the broiler processing segment (from 80,000 birds per day to 240,000 birds per day by mid-FY19), (iii) construction of by-product processing plant, (iii) construction of a new aqua feed milling plant, and (iv) extension of existing jetty and upgrade of ship unloaders in Lumut, Perak.

Fund raising exercise. MFM had on 19 Jul 2018 proposed a fund-raising exercise to raise up to RM275.1m via a combination of (i) rights issue of 5-year redeemable convertible unsecured loan stock (RCULS), and (ii) rights issue of shares.

Capacity expansion to lift and broaden earnings. The capacity expansion (which will be completed in stages) at the poultry integration segment will lift MFM’s earnings over the next few years, on the back of higher capacity. Earnings growth prospects aside, we note the ongoing capacity expansion will also broaden MFM’s earnings base (albeit gradually) within the poultry integration segment, hence easing earnings volatility, as higher production output at the processing sub-segment allows MFM to divert more broiler output into the processing sub-segment (i.e. processed and/or further processed products), which command higher profit margins and more stable prices.

Earnings recovery from FY19. We believe MFM’s earnings will bottom in FY18 and recover to RM59.4m and RM62.0m in FY19-20, underpinned by (i) improved broiler production performance (as the issue has already been rectified since end-1H18), (ii) higher production capacity at downstream processing sub-segment, which carries better profitability vis-a-vis live birds, (iii) turnaround at 30%-owned JV as price competition has eased since 3Q18, and (iv) higher aqua feed sales volume.

Fair value of RM0.72. We derive a fair value of RM0.72 on MFM by using sum-ofparts valuation, i.e. (i) 12x FY19 core net profit for flour and grains segment, in line with MSM Malaysia’s valuation multiple given the similarities shared between MFM and MSM, (ii) 10x FY19 core net profit for poultry integration segment, in line with the smaller sized integrated poultry players in Malaysia, and (iii) adding on proceeds from its fund-raising exercise.

Source: Hong Leong Investment Bank Research - 3 Jan 2019