Investment Merits

• Benefitting from recovery in consumption and flour division’s lower  raw material prices

• Poultry division benefitting from JV with US-based Tyson Foods,  with rising utilisation rate and operational efficiencies

• Undervalued stock trading at 7x 2023F P/E on a fully-diluted basis,  on significantly below its peer range of 10-12x and >-1SD below its  historical mean

Company Profile

Malayan Flour Mills (MFM) has two main business divisions: flour  milling and grain trading; and poultry farming and processing. The  poultry farming and processing division is now a 51%-owned JV,  following the 49% stake disposal to Tyson Foods in 2021. The flour  division delivered 60% of 2022’s earnings, with the poultry division  contributing the rest. Through its 30%-held JV, MFM’s flour division has  operations in Malaysia, Vietnam, and Indonesia with capacities of  420,000, 882,000 and 1.45m tonnes per year. It sells mostly nongeneral purpose flour products, with general-purpose flour making up  less than 5% of sales volume. Its integrated poultry division consists of  feed milling, breeder and broiler farming, and poultry processing. It  produces 51m chicks annually. MFM’s poultry processing plant has a  capacity of 280,000 birds per day and services customers like  McDonald’s, Texas Chicken and Kentucky Fried Chicken.

Highlights

Flour business was volatile in 2021 and 2022 due to wheat prices,  which catapulted to all-time highs last year before falling back to current  levels. COVID-19 restrictions affected demand during this period – the  situation has since eased. Going forward, earnings should be driven by  normalisation of demand as well as lower wheat prices.

Recent expansions were in Vietnam and Indonesia, where  consumption of flour per capita is on the rise. Consumption per capita is  15-17kg in Vietnam, 26-28kg in Indonesia, and 38-40kg in Malaysia.  This shows growth potential in Vietnam and Indonesia is huge, and  MFM’s dominant position enables it to benefit. MFM’s Malaysian flour  mills were running at 59% capacity in 2022, while Vietnam and  Indonesia were at 57% and 59% – leaving room for volume expansion.

Vietnam and Indonesia are deregulated markets when it comes to  flour prices. This would imply that MFM could pass on rising costs to  customers via selling price hikes, and vice versa if the need arises. As  wheat prices fell more than 50% in the past one year, we can expect  price moderation in the coming months once MFM has fully utilised its  higher-priced wheat inventory. However, to mitigate risks, MFM does  practice hedging on a 6-month average rolling basis. 

Growth of poultry division remains biggest catalyst. MFM’s poultry division booked a solid recovery in 2022, on the back of its tie-up with Tyson Foods (which helped pushed average utilisation of its processed chicken plant to 51% from 45% in 2021). At end-4Q22, utilisation rate was 60%. A recovery of live chicken prices and subsidy from the Malaysian Government due to controlled chicken prices helped MFM post a profit following a loss in 2021. The selling price of processed poultry products is not controlled, and market-dependent. An increase in utilisation rate would enable MFM to benefit from operating leverage and post stronger profits.

The Tyson Foods collaboration involves a 5-year offtake supply agreement with Mac Food (a McDonald’s Malaysia supplier) for the Malaysian market, with an annual renewal for one year; and a 10-year grain supply agreement with subsidiary Premier Grain for the supply and sourcing of corn and/or soybean meals to farms. In addition, MFM is leveraging on Tyson’s existing distribution channel by planning expansions to new export markets like Singapore and the Middle East, probably in 2023. This agreement comes with conditions, with the MYR420m consideration to be paid in stages – an initial MYR140m, followed by MYR140m if EBITDA is MYR141m in FY22, and the final MYR140m if EBITDA is MYR173m in FY23. MFM did not meet FY21’s profit guarantee of MYR54m, but surpassed FY22’s MYR141m. After five years, Tyson Foods has a call option to buy another 11% stake. MFM targets to hit 75% and 100% utilisation rates in 2023 and 2025. If achieved, it should surpass its profit guarantee for FY23.

Company Report Card

Latest results.MFM recorded a core net profit of MYR134.7m in FY22,  driven by a turnaround to profitability at its poultry JV and offset by  lower profit contribution from the flour division (-32%).

Balance sheet/cash flow. At end-FY22, net gearing was 76% (FY21:  81%). This should improve further, as part of the disposal proceeds  would be used to repay debt while operational cash flow improves on  the back of lower commodity prices. In the longer term, however, once  expansion for its poultry division takes place, net gearing could pick up  again, albeit below its maximum target of 1x.

MFM has no official dividend policy but has been rewarding investors  at a payout ratio of 10-25% over the last two years. Assuming 2023’s  net DPS is 3 sen (2022: 3 sen), this is a reasonably attractive 4% yield.

Management. MFM is helmed by major shareholder and managing  director Teh Wee Chye. The other major shareholder is the estate of the  late Tun Arshad bin Ayub – whose son, Azhari Arshad, is an executive  director of the firm, in charge of business development and government  liaison. Together, they hold c.30.2% of the company.

Investment Case

Fair value of MYR0.95-1.05 based on fully diluted share base. We  believe MFM should be ripe for a re-rating, especially since it has  proven its ability to achieve EBITDA targets for the poultry business.  The flour division should see improvements coming from lower raw  material prices. Our fair value of MYR0.95-1.05 is based on a target P/E  of 9-10x 2023F, in line with its peers and at -0.5 to -1 SD below its  historical mean.

Key risks include externalities like diseases affecting poultry  production, commodity price direction, and government regulations.

Source: RHB Securities Research - 16 May 2023