• Maintain BUY, with new MYR1.65 TP from MYR1.51, 15% upside. Farm Fresh’s 9MFY24 (Mar) results broadly met expectations in anticipation of greater GPM recovery ahead. Near-term outlook will be supported by cost tailwinds and rising contributions from new products. FFB has outperformed most consumer sector peers by delivering eye-catching topline growth consistently notwithstanding the soft market condition. In addition, we like its multi-pronged expansion roadmap to drive longer-term prospects by penetrating into new market segments and geographical markets.

• 9MFY24 results deemed within expectations. Core net profit of MYR42m (-15% YoY) only accounted for 64% of our and consensus forecasts but we anticipate further margin recovery ahead to drive stronger earnings. Post- results, we make no material changes to our earnings forecasts. However, our DCF-derived TP is adjusted to MYR1.65 (inclusive of a 6% ESG premium) after rolling forward our valuation base year. Our TP implies a 29x FY25F P/E which is at a discount to large-cap consumer staple peers.

• Results review. YoY, 9MFY24 revenue jumped 27% to MYR595m driven by rising food service and hotel industries or HORECA sales, contribution of new ultra-high temperature (UHT) products and the consolidation of the ice cream business. Meanwhile, 9MFY24 GPM expanded by 0.4ppt thanks to the easing input costs and aided by the higher GPM of the ice cream business. However, 9MFY24 opex was 54% higher YoY to support business expansion and new product launches, resulting in a 7% decline in 9MFY24 PBT. QoQ, 3QFY24 sales rose 7% to a historical high of MYR212m on relentless sales momentum of UHT products. On the other hand, 3QFY24 GPM continued the strong recovery traction by expanding by 4.7ppts to 31% – the highest since FFB’s listing – to reflect the lower input costs. As a result, 3QFY24 core net profit jumped 44% to MYR21m.

• Outlook. We anticipate greater GPM recovery going forward on lower input costs and growing scale. Meanwhile, management expects farm gate prices in the coming season starting Jul 2024 to further moderate by 5-6% (2023: -4%). On the other hand, robust growth of UHT products (9MFY24 +48% YoY) and new product launches should continue to anchor its topline momentum. Key new product launches in 2024, which include consumer packaged goods ice cream, junior cultured milk, and butter, will diversify FFB’s revenue stream and addressable markets. Meanwhile, the expansion into the Philippines market is scheduled to take place in mid-2024 – centred around an assortment of chilled, UHT and growing-up milk powder products, with a primary focus on the Greater Manila area.

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

Source: RHB Research - 29 Feb 2024