• Keep NEUTRAL with new MYR1.20 TP from MYR1.23, 0% upside. Farm Fresh’s 1QFY24 (Mar) core earnings trailed estimates on persisting input cost pressures. Whilst our 1-year forward view assumes earnings will pick up gradually from the lacklustre base, current valuations are not compelling enough for us to be more positive on the stock. We maintain our NEUTRAL recommendation as we await better earnings delivery and margin visibility before we can base our view on the strong FY25F earnings base.

• 1QFY24 results below expectations. Core net profit of MYR5.3m (-72% YoY) met only 6-7% of our and consensus’ forecasts due to a worse-thanexpected margin squeeze stemming from elevated raw material costs. Post results, we cut FY24F earnings by 10% but keep FY25-26 forecasts materially unchanged. Correspondingly, our DCF-derived TP is lowered slightly to MYR1.20 (inclusive of a 6% ESG premium), implying 31x P/E FY24F or at a sizeable discount from the large-cap consumer staple peers.

• Results review. YoY, 1QFY24 revenue surged 29% to a record high of MYR186m, thanks to robust growth from both Malaysia and Australia operations, on the back of new product launches and positive traction in the food service and hotel industries (HORECA) segment. However, 1QFY24 GPM narrowed by 8.5ppts to 17.7% as a result of a sharp hike in input costs and higher sales contribution from the Australia operations which command lower margins. Meanwhile, opex jumped 35% YoY to support business expansion and brand-building initiatives. QoQ, 1QFY24 revenue was 15% higher thanks to rising contribution from HORECA channels and new product launches. That said, 1QFY24 core net profit slid 36% QoQ on lower GPM due to the low utilisation rates in Australia, higher distribution expenses in tandem with higher sales, and rising admin costs relating to The Inside Scoop acquisition.

• Outlook. With the price downtrends of whole milk powder (WMP) and farmgate milk, we understand that margins could start to recover gradually from August – also taking into account the 5% price increase for chilled products effective mid-July. Whilst the 4% fall in farmgate milk prices (16% of its FY24F milk requirement) will be largely locked in for the entire new season (Jul 2023-Jun 2024), we highlight the sharp drop in WMP (49% of its FY24F milk requirement) prices in July-August (Figure 2) could translate to more cost savings in 2024. Meanwhile, the encouraging sales growth momentum is expected to sustain with new capacity coming on stream to facilitate FFB’s penetration into the ambient and growing-up milk segments.

• Risks to our recommendation: Higher/lower-than-expected input costs and higher/lower-than-expected market shares.

Source: RHB Securities Research - 1 Sept 2023