Valuation / Recommendation

We have a SUBSCRIBE recommendation on Farm Price Holdings with a FV of RM0.29 based on 13x FY24F EPS, translating to 21% upside to IPO price. Our target PE of 13x is pegged to the average PE of FBM Small Cap Index, given no direct comparable listed peers.

Investment Highlights

Localised presence in Johor and Singapore. With its Senai Centralised Distribution Centre (SCDC), Farm Price predominantly serves customers in the Johor market (65% of FY23 sales) and also Singapore (25% of FY23 sales). Over the past three years, the group has managed to consistently achieve positive sales growth, with a 3-year CAGR of 15.8% over FY20-23. This represents resilient demand for fresh vegetables, despite disruptions coming from COVID-19 pandemic during the period. We believe Farm Price could grow its FY24-26 sales by 10-11% p.a., on the back of a robust domestic market and rising contribution from export sales to Singapore.

Healthy margins. Despite weaker Ringgit (>80% of its fresh vegetables are imported), Farm Price maintained healthy gross margins of 14-20% in FY20-23, thanks to inelastic demand and frequent pricing adjustments. The lower margins recorded in FY21-22 were mainly dragged by labour shortages and higher shipping costs during the COVID-19 pandemic. Since then, gross margins have rebounded considerably to 20% in FY23, underpinned by better operation efficiency and favourable supply conditions. In our view, we believe the group can sustain its gross margins at around 19%, with higher margins from Singapore sales (nearly twice the margins of domestic sales) help to mitigate potential cost increases.

Timely and crucial expansion. With the expansion at SCDC, Farm Price will eventually add new cold room space and facilities to handle up to 40k pallets annually by 2026 (from about 30k pallets currently). This expansion will be crucial to support Farm Price’s future growth, as its cold room capacity was fully utilised in 2023. Notwithstanding that, we believe the group has some room to maneuver in the near term (i.e. FY24-25) by implementing various storage management measures such as 1) Running extra processing shifts and facilitating additional delivery trips to free up inventory space; or 2) Renting on-site mobile refrigerated containers.

Risk factors for Farm Price include (1) Labour shortages.; (2) Fluctuation in fresh vegetable prices; and (3) Forex risks.

Financial Highlights and Valuation

Positive growth trend. Farm Price is based in Johor, with its centralised distribution centre located in Senai. As such, the group predominantly serves customers in the Johor market (65% of FY23 sales) and Singapore (25% of FY23 sales). The remaining sales come from various states in Peninsular Malaysia and Sarawak.

Over the past three years, the group has consistently achieved positive sales growth, with a 3-year CAGR of 15.8% over FY20-23. This represents resilient demand for fresh vegetables despite disruptions from the COVID-19 pandemic during the period. Both the domestic market (still largely Johor) and the Singapore export market contributed to the robust growth. See Figure 1 below.

Healthy margins. Despite the weaker Ringgit (>80% of its fresh vegetables are imported), Farm Price maintained healthy gross margins of 14-20% in FY20-23, thanks to inelastic demand and frequent pricing adjustments for vegetables. The lower margins recorded in FY21-22 were mainly dragged by labour shortages and higher shipping costs during the COVID-19 pandemic. Since then, gross margins have rebounded considerably to 20% in FY23, underpinned by better operation efficiency and favourable supply conditions. See Figure 2 below.

Singapore is a significant market. Despite making up just 20-25% of sales, Singapore is a substantial market for Farm Price, as its margins are nearly twice the margins earned on domestic sales. We believe this is simply due to the stronger purchasing power of the Singapore Dollar. To further grow export sales, Farm Price intends to set up a marketing office in Singapore to help facilitate the market reach of its products to potential new customers.

Facility expansion needed to support future growth. With the expansion at SCDC, Farm Price will eventually add new cold room space and facilities to handle up to 40k pallets annually by 2026 (from approximately 30k pallets currently). This expansion will be crucial to support Farm Price’s future growth, as its cold room capacity was fully utilised in 2023. Notwithstanding that, we believe the group has some room to maneuver in the near term (i.e. FY24-25) by implementing various storage management measures such as 1) Running extra processing shifts and facilitating additional delivery trips to free up inventory space; or 2) Renting on-site mobile refrigerated containers.

Steady profit growth. We believe Farm Price could grow its FY24-26 sales by 10-11% p.a. on the back of a robust domestic market and rising contribution from Singapore. In our view, its gross margins can be sustained at around 19%, with higher margins from Singapore sales helping to mitigate potential cost increases. Overall, we forecast a higher net profit of RM10-14m for Farm Price over FY24-26F, up from RM8.7m in FY23.

Healthy cash flow to support dividend payout. Post IPO, Farm Price’s balance sheet will be stronger, with its net gearing level turning net cash. Given the nature of its business, operating cashflow generation is expected to remain healthy, while capex spending will be funded by the IPO proceeds. As such, we forecast that Farm Price could comfortably adopt a 30-50% dividend payout in FY24-26F.

RM0.29 FV based on 13x FY14 PE. There are no direct comparable listed peers for Farm Price on Bursa Malaysia. The Agricultural Product subsector is also not representative, given that most of its constituents are mainly involved in poultry, seafood produce, or animal health services. As such, we pegged our target PE valuation to 13x, similar to the average PE of the FBM Small Cap Index. Pegging 13x PE to our FY24 EPS forecast, we derive an FV of RM0.29 for Farm Price.

Source: Mercury Research - 29 Apr 2024