Valuation / Recommendation

We have a SUBSCRIBE recommendation on Farm Fresh Berhad with a target price of RM1.53 based on peers average PE of 28.8x and FY23F EPS of 5.3 sen. We like Farm Fresh for its strong market presence in Malaysia’s dairy industry, local and regional expansion plans. The company has a dividend policy of 25%. The target price represents a potential return of 13.3% over the IPO price.

Investment Insights

Strong market presence. Farm Fresh is one of the biggest and fastest growing players in Malaysia’s dairy industry. The company has a strong market presence across various dairy categories in Malaysia as of 9M21, commanding (1.) 42% market share in Chilled RTD Milk (54% in Chilled RTD Milk products manufactured with fresh milk), (2.) 10% in Ambient RTD Milk (48% in Ambient RTD Milk products manufactured with fresh milk), and (3.) 11% in Yoghurt. We think that the company is well-positioned to expand its presence locally on the backdrop of a growing Malaysian dairy industry which is projected by Frost & Sullivan to grow at a 5-year CAGR of 10%, 8%, 7% for the Chilled RTD Milk, Ambient RTD Milk, and Yoghurt industry from 2020 to 2025.

New dairy farm and integrated processing facility to spur growth. As at LPD, Farm Fresh is exploring with a company to utilise its existing land spanning 500- 1,000 acres for the establishment of an integrated dairy project, with the first heifer expected to arrive by 1Q24. The new farm is expected to have a capacity of 3,000 dairy cows, increasing the aggregate capacity by 25.4% to 14,834 dairy cows. Completion of the new manufacturing hub is expected to increase total annual production capacity of finished chilled RTD products by 20.8m litres with the additional 2 filling and packaging lines.

Regional expansion. The company plans to increase production capabilities in Australia through the expansion of the Kyabram Facility, which will allow the Group to manufacture UHT/ambient products to serve as an export hub to the AsiaPacific region. Expansion is expected to begin in 1H22 and production expected to commence in 2Q23. The company also seeks to expand its presence in Indonesia and the Philippines by establishing new production and distribution capabilities, which will increase total annual production capacity by approximately 20.8m litres of finish products. RTD milk segment in Indonesia and Philippines is expected to grow at a 5-year CAGR of 9.3% and 6.5% from 2020 to 2025 as forecasted by Frost & Sullivan.

Experienced management team. The company has an experienced management team spearheaded by managing director Mr Loi Tuan Ee who has more than 15 years of experience in the dairy industry.

Risk factors. (1) Fluctuation of feed prices. (2) Labour shortages. (3) Unexpected pandemics of infectious disease

Source: Mercury Research - 2 Mar 2022