• Reiterate BUY and TP of MYR1.75, 16% upside. 9MFY23 (Mar) results met our, but missed consensus expectations. We are optimistic on its earnings growth outlook supported by new production facilities coming on stream, product launches and receding cost pressure. We continue to like Farm Fresh for its positive traction in the domestic ready-to-drink (RTD) milk markets underpinned by deeper market penetration, orchestrated by an entrepreneurial management team. We are also convinced with its multi- pronged expansion strategy to sustain long-term earnings growth.

• 9MFY23 results were in line with our, but fell short of consensus forecasts. Core net profit of MYR49m (+2% YoY) accounted for 73% and 65% of our and Street forecasts. Post-results, we make no material changes to our FY23F-25F earnings and maintain our DCF-derived TP of MYR1.75 (inclusive of a 6% ESG premium). The TP implies 34x 2023F P/E, which is at a discount to its large-cap consumer staple peers.

• Results review. YoY, 9MFY23 revenue surged 25% to MYR468m driven by robust consumption growth, ASP adjustments, contribution from new products and the school milk programme. However, GPM slipped by 1.7ppts to 25% to account for higher raw material and freight costs. As a result, 9MFY23 PBT fell 4% to MYR48m as opex rose in tandem with topline growth and to support new product launches. QoQ, 3QFY23 revenue was flattish at MYR162m as softer seasonality (lower milk consumption during school holidays) offset the higher sales from its Australia operations. GPM was also constant QoQ with margin dilution from the Australia operations reversing the margin improvement in Malaysia (+0.7ppt) on the back of a retreat in milk powder prices. Together with a lower opex from the school milk programme, 3QFY23 core net profit jumped 27% to MYR17m.

• Looking forward to a defining FY24F. We expect earnings recovery to continue going forward taking into account the robust volumes and receding cost pressure which should lead to further GPM expansion. QoQ consumption should pick up with school reopening and earlier Ramadan timing, which should spur the demand for kurma milk. Looking further ahead, we anticipate FY24F earnings to jump 50% YoY, which will see new plant commissioning production relieving capacity constraints and facilitating new product launches. In addition, a further retreat in commodity prices will be another catalyst to propel margin expansion. Elsewhere, downstream ventures via JomCha and Inside Scoop should also gain more traction given outlet expansion plans.

• Risks to our recommendation include a sharp rise in input costs and major delay in expansion plans.

Source: RHB Research - 27 Feb 2023