Last week, PWF announced its FY16 results which showed net profits growing to a fresh record high of RM12.9m (+115.0% YoY). Beyond this, we see various avenues which PWF can tap on for continued growth, including on-going expansion broiler farms and breeder farms, which will add 5% and 65% production capacities, respectively, in addition to the conversion of existing broiler houses to the more efficient closed-type broiler houses. We have projected PWF’s earnings to grow by 11.7%/9.0% for FY17/FY18. However, as the share price is trading within our FV range of RM0.80-RM0.86 (based on the industry average PER of 9.1x), we opt to bring closure to our previous Trading Buy recommendation for a decent 64% gain. NOT RATED. Farming it! Including dividends, PWF has returned 64% since our Trading Buy report dated 15 Jan 2015. During this time, the share price had also undergone a series of corporate exercise adjustments, including a 1:5 bonus issue (20 Jan 2015), a 2:1 share split and 3:10 bonus issue of warrants (11 Jul 2016) and more recently, stock dividend at 1:25 derived from the company’s treasury shares (10 Nov 2016).

Expansion drive spurs growth. From FY13 to FY15, PWF’s revenue grew at a CAGR of 6.0% while its Net Profit increased at a CAGR of 4.1%. Nevertheless, PWF released its FY16 report card just last week, showing a record revenue of RM326.7m (+12.3% YoY), and Net Profit of RM12.9m (+115.0% YoY). The improved top-line growth was mainly driven by an increase in selling prices of broiler and well as high production volumes following the expansion of its broiler farms. Meanwhile, a combination of higher selling prices and greater economies of scale led to net margins almost doubling from 2.06% to 3.95% (+1.89ppt).

Achieving greater economies of scale. PWF’s rapid expansion phase began in September 2013 with maiden commencement of its layer farm for table egg production. Building upon the diversification into breeder farming and trading of grain and poultry nutrient products in prior years, this has allowed the group to integrate its business strategy to derive greater economies of scale and gain more effective and efficient control over cost and quality in the entire value chain as evident by the EBIT margin expansion from 3.55% in FY13 to 6.07% in FY16.

Avenues for continued growth? We see various avenues for continued expansion based on information gleamed from the company’s website and latest circular (May 2016), such as: (i) ongoing conversion of existing open-type broiler houses to the more efficient/disease resistant close-type broiler houses (a similar strategy currently being employed by CAB Cakaran) and (ii) the construction of new close-type broiler farms in Trong, Perak and breeder farms in Sungai Batu, Kedah, which will increase capacity by 5% and 65%, respectively, both expected to be completed by end-2017.

NOT RATED with a FV range of RM0.80-RM0.86. We project earnings to grow by 11.7%/9.0% to RM14.4m/RM15.7m for FY17/FY18, underpinned by the growth drivers mentioned above and a 0.25ppt/0.14ppt net margin expansion to 4.07%/ 4.21%. We also estimate dividends at 4 sen/ 4.5 sen (DY: 4.8%/5.3%) based on a 50% pay-out ratio. Nevertheless, as we believe the share price is trading within our fair value range of RM0.80-RM0.86 (based on 9.1x FY17E/FY18E EPS in-line with the valuations for the industry average), we decide to close our previous “Trading Buy” recommendation, and lower our call to NOT RATED.

Source: Kenanga Research - 10 Mar 2017