• Initiating coverage with BUY and a MYR1.88 TP, 24% upside with c.1% FY23F (Mar) yield. Farm Fresh’s proposition to offer fresh dairy products has been well-received and fuelled a significant market share gain. FFB is embarking on a multi-pronged expansion plan to capture the rising consumption climate, which will drive exciting earnings growth, in our view. Together with brand equities, a visionary management team, and strong ESG credentials, we believe the counter deserves a valuation premium, given the scarcity of quality consumer staple stocks in the local market.

• Meteoric rise of a home-grown brand. Having only started in 2010, FFB rose rapidly to establish itself as a prominent player in the local dairy industry, with a 23% share in the ready-to-drink (RTD) milk market as at March. Ultimately, we believe its commitment to offer fresh and nutrient-rich dairy products at affordable prices has been the critical success driver. Going forward, FFB should chart sustainable growth, considering its efforts to further uplift its market share and the robust industry growth. The latter is underpinned by rising demand for fresh and organic products, supported by increasing health consciousness and affluence amongst consumers.

• Multi-pronged growth strategy. FFB has earmarked MYR240m (80% of its IPO proceeds) for expansion and will increase its production capacity by 23% in FY23, and by another 52% in FY24. This ambitious expansion will accommodate its growth strategies, including: i) Strengthen its presence in the ultra-high temperature (UHT)/ambient segment, ii) new ventures into the sizeable growing-up milk segment, iii) expansion into new export markets in Indonesia and the Philippines, and iv) new product launches (including plant-based yoghurt and non-dairy packaged F&B products). Taking into account all this, we forecast a 3-year net profit CAGR of 21%.

• Operating on a “grass-to-glass” model. FFB’s integrated business model has given it competitive advantages over its peers – operating six dairy farms improves the efficiency of its supply chain and optimises costs. Simultaneously, its multi-channel distribution model minimises concentration risks. It is worth highlighting that FFB’s home dealership model has been instrumental in extending its outreach to the more remote areas without having to spend big advertising & promotions (A&P) dollars. That also scores FFB some ESG brownie points, considering the social benefits arising from the creation of a women-centric micro-entrepreneurial network. We assign an ESG score of 3.3 to FFB and apply a 6% premium to derive our DCF-derived (WACC: 6.4%, TG: 2%) TP of MYR1.88. The TP implies 31x P/E 2023F, which is at premium over its mid-cap peers.

• Risks to our recommendation include a sharp rise in commodity prices and major delays in expansion plans.

Source: RHB Research - 21 Jun 2022