Initial Public Offering (IPO)
IPO - Farm Fresh (Part 2) Analysis & MQ Trader Views
MQTrader Jesse
Publish date: Wed, 02 Mar 2022, 05:33 PM
In the previous blog, IPO - Farm Fresh (Part 1), we have walked through Farm Fresh's company background and usage of the IPO proceeds. Next, we will share our research on its financial position as well as our view on this IPO in this blog post.
Financial Highlights
- Revenue reached a new high at FYE 2021 with RM 490 million, this also shows that the company keeps expanding its market.
- The gross profit margin is within the range between 26% - 30%. (Generally GP margin 20% is considered high/ good).
- PAT margin decreased from 15.4% (FYE 2019) to 6.7% (FYE 2021). As per check through the income statement, the increasing selling and distribution expenses and the additional tax for prior years had impacted the net profit of Farm Fresh at FYE2021. Dutch Lady PAT margin is 6.66% ( FYE 2020).
- The gearing ratio increased from 0.39 (FYE 2019) to 1.03 (FYE 2021) high gearing ratio also shows that this company management team is aggressive on expanding the business.The increased of gearing ratio primarily due to the increase in borrowings incurred to fund the expansion of the farm and manufacturing operations on Kyabram Facility and Muadzam Shah Farm (Good gearing ratio should be between 0.25 – 0.5)
Comparision between competitor
Comparison of Margin with the industry competitor (2021 result)
|
|
Farm Fresh |
Dutch Lady |
F&N |
|
Gross Profit Margin |
28.70% |
34.00% |
28.90% |
|
Operating Margin |
15.77% |
25.23% |
11.43% |
|
PBT Margin |
13.80% |
25.10% |
11.61% |
|
Net Profit Margin |
6.70% |
21.90% |
9.57% |
Adjusted (exclude all the one-off gain/loss) Margin , estimated by MQ Trader Group
|
|
Farm Fresh |
Dutch Lady |
F&N |
|
Gross Profit Margin |
28.70% |
34.00% |
28.90% |
|
Operating Margin |
15.77% |
11.75% |
11.43% |
|
PBT Margin |
13.80% |
11.61% |
11.61% |
|
Net Profit Margin |
11.90% |
8.40% |
9.57% |
-
The cost of sales for Dutch Lady is much lower compared to the competitor, therefore the gross profit margin for Dutch Lady is 34% which is around 5% of the difference from the competitor.
-
The net profit margin of Dutch Lady is significantly higher than its peers because it received an exceptional gain (Q4 other income) of RM 155 mil resulting from the completion of the sales of land and manufacturing facilities in PJ. To exclude this exceptional gain from the comparison, we replace Q4’s other income value with the average other income value of the previous quarters from Q1 to Q3 which is *RM 2.448 mil. As a result, its operating Margin, PBT margin and net profit margin will be reduced to 11.75%, 11.61% and 8.40% relatively.
-
Farm Fresh has an additional tax for prior which is around RM 25.7 mil, if the one-off tax expense had been excluded, the Net Profit Margin will be increased to 11.90%
-
According to the adjusted profit margin comparison, three of the companies have net profit margins with approximately 3% - 4% difference with each other.
*Other Income Q1: RM4.129 mil; Q2: RM1.797 mil; Q3: RM 1.417 mil. Average= RM 7.343 mil / 3 = RM 2.448 mil
Operational data
Through the operational data we find out that the company’s milking cows, raw milk output and revenue are increasing. According to the data, we know that this company's market share is still growing and expanding.
Business segment
Major customer & suppliers
The top 5 customers only took 31.50 % of total revenue. This show that the diversify of customers benefit toward the bargaining power of suppliers
The top 5 suppliers took 60.60% of total purchases. The first supplier had nearly taken up 1/3 of the purchase amount from Farm Fresh. The management team had mentioned that to avoid the over-power of suppliers they made the strategic decision to invest in a processing facility in Kyabram, Australia, which was commissioned in October 2020. This decision has diversified their supplier base.
Revenue Segmentation (Product)
- Chilled RTD Milk - Farm Fresh branded Chilled RTD milk products are pasteurised milk made from raw milk. Pasteurisation is generally adopted in the dairy industry to reduce the risks of disease from microbial growth while preserving the nutrients of fresh milk.
- UHT/ ambient products - UHT/ambient milk products under different brands. Compared to the fresh milk products, our UHT/ambient milk products have a longer shelf life.
- Yoghurt products - Yoghurt products are made by cultivating live lactic acid bacteria in the milk. In addition to plain yoghurt, they offer flavoured yoghurt by blending plain yoghurt with fruit pulp, farm yoghurt and greek yoghurt.
- Plant-based products - The plant-based products are lactose free and vegan.
- Sauces - Sauce products under the Taylor’s brand offering a selection of gourmet sauces and marinades. The sauce products across various flavour varieties.
Industry Overview
The Malaysian consumption of milk and milk products per capita grew from 53.3 kg per person in 2015 to 54.3 kg per person in 2020, at a CAGR of 0.4%. The consumption per capita recorded in Western developed countries in 2020 (e.g., Australia 287.3 kg, United States 276.2kg) was higher in general when compared to developing countries in Southeast Asia (e.g., Philippines 23.1 kg and Indonesia 17.2 kg).
Farm Fresh market share in the chilled RTD milk segment has tripled from 12% in 2015 to 40% in 2021. The market share in Ambient RTD milk rose from 1% in 2018 to 10% in 2021. The yoghurt segment in 2021 had grown to 11% which is 2 times more than the market share (5%) in 2015.
Farm Fresh is one of the top three players in both RTD milk and yoghurt categories. Its market share and ranking has been increasing over the years, and its performance stood out from its peers even in the first half of 2021, when it still recorded sales growth despite the market recording a slight decline compared to the same period in 2020. Farm Fresh is anticipated to be the second largest player in the RTD milk category and the third largest player in the yoghurt category in Malaysia in the first half of 2021. At the same time, Farm Fresh has the potential to be the market leader in Malaysia in the chilled RTD milk segment.
Future plans and strategies for Farm Fresh
- Expand the capacities across the value chain in Malaysia
- Continue to develop and grow the product portfolio.
- Regional expansion outside of Malaysia
MQ Trader Views
Opportunities
- Business is not affected by MCO as it is an “essential service” since farm fresh supply produces milk and other dairy products which are consumed on a regular basis.
- Plan to expand the business to the Philippines and Indonesia market. The high population in the Philippines and Indonesia with potential RTD milk market and the continuous growth in Malaysia’s market share caused the management team to expand the market. Other than that, the high demand for halal products in Indonesia also benefits Farm Fresh from expanding its business in Indonesia.
- Implementing a vertically integrated business model provides a stable supply chain for the company.
- There is still room for growth in the milk market. According to the research, the consumption per capita of Southeast Asia developing countries is only around 1/10 of the western developed countries.
Risk
- A strong competitor in Malaysia - Dutch Lady. Dutch Lady has a very strong background as the parent company Royal FrieslandCampina is a Netherlands brand with over 140 years of history. Royal FrieslandCampina is the world's top 5 dairy companies, and the subsidiary company Dutch Lady is also a dairy industry market leader in Malaysia.
- High gearing ratio due to the expansion of business. However, as long as the company keeps growing on its revenue and profit then they are able to settle the debt.
- Raw material price increase, for example the oil price will affect the transportation cost and the price of plastic/paper will affect the packaging cost.
- The capital from this IPO can only last for 2 years. Therefore, the investor must take note of the quarterly report and follow up on the status regarding the expanding process in the Philippines and Indonesia.
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Discussions
1 person likes this. Showing 39 of 39 comments
@EatCoconutCanWin PE 70 including the one-off tax payment. The adjusted PE should around 36 times
This values the company at approximately 69 times its FY2021 (ended March 31) profit of RM36.2 million and 36 times its adjusted profit of RM69 million, after taking into consideration factors that include one-off tax liability expenses which are not part of its core earnings.
Source: theedgemarkets
2022-03-03 11:27
every year companies have to pay corporate tax. Do you plan to exclude it off too?
2022-03-03 11:31
Good in-deep study MQ. Well done.
I would like to add on a few risk factor:
1) with high gearing, future interest hike may affect the profit.
2) is the expansion plan in the IPO prospect factor in current inflation such as logistic, animal feed, stainless steel etc?
3) F&N has invested in milk cow farm land in Perlis, we can foresee the competition will be intense in next 2-3 years.
BTW, if you gonna publish 3rd report, could you include the PE comparison to peers, discount cash flow method, how PE36 concluded for FARM Fresh?
And the productivity year of milk cow as well as biological asset depreciation .
Again, looking forward to read your analysis. :)
2022-03-03 11:59
the author highlighted the biggest issue here. The capital from this IPO can only last for 2 years. What happen after 2 years? Rights issue? Private placement? The high borrowings is also a big concern. I never liked companies with such debt..
2022-03-03 12:41
hi Goh, Well i would like to see it positively that the company will immediately use the proceeding to build new plant and farm and it takes only 2 years. I hate those management hold the fund raised by depositing in bank for low interest income. From the GP, i see the revenue generated from the new investment are enough and sustainable for working capital therefore the co does not need to raise fund for working capital more than 2 years. Other words, the new plant n farm has positive cash flow.
2022-03-03 12:56
@Cipta definitely FarmFresh will have positive cash flow. But the interest expense will eat into its profit. Dutch Lady latest FYE RM1.14b. Net profit RM248m PE 8.4 EPS 388 DY 1.54%.. incomparable to DutchLady. Don't expect much from this new IPO.
2022-03-03 13:11
@goh yeah, i expect interest will go up in 1 or 2 years if no sudden drop of economy and it will eat into Farm Fresh profit. With the new facility as security, the management can renegotiate the loan interest may be.
From the PE alone, I would pick Dutch Lady from open market instead of locking my fund a few weeks for lucky draw. Moreover, Ductch lady is the no 1 in the fresh milk segment and declare dividend consistency.
I would like to listen MQ how PE36 arrived for Farm Fresh. Shall we?
2022-03-03 13:25
they arrived at PE 36 by not paying any single sen of tax which is very misleading.. The PE will be printed as at least 70 when listing date comes. I want to know how much amount of tax they underestimated in the prior year?
2022-03-03 13:38
Historical PE 36x is derived from FYE 31 March 2021 adjusted profit of RM69mil derived after adjusting for the the one-off tax expenses of RM25.7mil, all of which is contained in the IPO Prospectus
2022-03-03 14:22
PE is Price/EPS no need further explain.
My question is: for instance, Dutch Lady, as per @Goh said is PE=8, why investment bank think it is 4x worth more than Dutch Lady? How they come into conclusion in this valuation?
2022-03-03 14:47
All I know is day after IPO sure fly, but whether it will hold for 6 months is another topic to go
2022-03-03 14:49
it is incorrect to say Dlady's PE is 8 because that PE is inclusive of one-off gains from asset sales in 4Q. If you exclude that, PE based on Dlady's core operations is about 27x (which is more in line with the valuation Farm Fresh is seeking)
2022-03-03 15:00
What is main product of farm fresh ?
How farm fresh to take over the market when so many product come out?
2022-03-03 16:13
will wait and see untill ipo listing. The pricing is a little bit on the high side.
2022-03-03 19:06
Hi @gohkimhock, here is the clarify for the Tax expense, there are 2 type of tax expenses which is "Current tax and deferred tax" & "Additional tax for prior years".
The current tax and deferred tax :
FYE 2021: RM 9.05 mil
FYE 2020: RM 1.79 mil
FYE 2019: RM 804k
The additional tax for prior years
FYE 2021: RM 25.70 mil
FYE 2020: -
FYE 2019: -
The additional tax is one off tax, therefore we only exclude the RM 25.70 mil of additional tax for prior year to get the adjusted figure under the margin part.
The one-off liability and penalty amounting to RM25.7 million for the years of assessment (YA) 2014 to 2020 ? which was recognised in FY2021 ? is in respect of non-approved locations for certain milk processing plants located in Larkin. (Source: theedgemarket)
2022-03-04 08:52
For the PE36x, according from IPO report
For illustration purposes only, assuming the Additional Tax Liability of RM 25,708,582 and the Larkin Facility Tax Incentive (as defined above) of RM 10,490,033 is allocated to respective financial year/periods, the adjusted consolidated PAT for the financial years/periods indicated would be as follows.
Consolidated PAT: RM 32,828 mil + Reallocation of additional tax liability: RM 25.709 mil +Reallocation of tax reversal: RM 10.490 mil = Adjusted PAT: RM 69.027 mil.
More information on the tax incentive you may refer: Farm Fresh - Prospectus (Part 2) Pg 292
2022-03-04 08:53
@Jesse why tax amount for YA2019 was only 804k? shouldn't it be 24%? In 2021 it was 10 fold..
2022-03-04 09:28
@Jesse looking at the comments, seems many casual investors are bearish on the stock, while more savvy investors / institutions are bullish. With institutions taking up nearly 92% of the stock and retail investors taking 8%. How do you think this will effect it and play out?
2022-03-04 11:09
@gohkimhock, these incentives have led to Farm Fresh incurring effective tax rate in Malaysia of 5.1% in FYE 31 March 2019, 5.8% in FYE 31 March 2020 and 8.5% (excluding impact of the tax reversal of RM 10,490,033) in FPE 30 September 2021, respectively which were lower than the Malaysian statutory tax rate of 24.0% for each of FYE 31 March 2019, FYE 31 March 2020 and FPE 30 September 2021.
Farm Fresh voluntarily sought clarification on 5 October 2020 from the MOA on the tax exemption status of the Larkin facility, they were informed that they were in bread of the Expansion Notification Requirement.
For more information regard the LPD you may refer Prospectus part 2 pg 292 & 293
2022-03-04 17:43
Beware of get rich quick IPO scheme.
Heavy weights will definitely unload when the price is right upon listing.
Listing date is their opportunity to become multi millionaire without a drop of sweat.
The anchovies better wait and see, don't swim into whale's mouth.
Let the hype settle.
2022-03-05 20:01
In spite of increased milking cows, output of raw milk dropped highlighting inefficient production.
2022-03-06 16:09
facebook have bursa bomoh condemn this company say milk not fresh and the IPO only base 60%..
2022-03-06 16:27
Looks like there's hidden agenda with the bomoh's claim. He did promote Summerfield milk in one of his post.
2022-03-06 17:59
Buy IPO share when market is hot. Else buy them after 1 year listing.
Better save then sorry .
2022-03-06 18:23
PE 36 is refer to fy2023 lo. PE 70 is 2021. 2022 not sure the report how yet. Dedak or cow feed rise lo 20-30%. I give TP 0.80
2022-03-07 11:57
Closing already
See Peer reaction will know is tat ff is will growing or not
2022-03-08 22:53
the CEO said cow milk is not powder. but reality in annual report have powder at 60%.
2022-03-09 08:20
Ms Jesse, time to include farm fresh 5306 discussion forum .
Many thanks!
2022-03-11 21:39
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Current pe ratio at 70. Omg super duper high. Only selling milk, nothing else. No good for farm as cow feed price increase, impacted earnings.
2022-03-03 10:16