• MYR0.54 FV based on 14x FY25F (Jun) P/E. As Malaysia is the world’s fifth- largest exporter of coffee and tea extract, Orgabio, as the country's third- largest instant beverage premix manufacturer with a halal certification, is poised to benefit from the increasing demand for convenience products with its strategic foothold in the Asia-Pacific region. With increasing sales orders from existing and new customers coupled with expansion plans, its projected FY25F P/E ratio of 8.5x presents a compelling investment opportunity, reflecting its strong turnaround potential in the dynamic beverage industry.

• Customer growth spurt. In 2QFY24, Orgabio expanded its customer base by securing four new major local clients, including emerging cafe chains and retailers. Notably, two of these clients swiftly ascended to become among its top 10 customers, with aggressive expansion plans. It also successfully on- boarded a new customer from Taiwan that markets its product in China, transitioning manufacturing services to Malaysia amid escalating geopolitical tensions. Existing clients have substantially increased orders since 2QFY24, with an expected +50% YoY sales from its largest customer in New Guinea by CY2024 in tandem with its expansion of distribution channels. Domestically, we see a gradual sales recovery from its major direct selling customers, TDC Avenue and Hai-O Enterprise, focusing on the Malay market.

• Utilisation surge pushes expansion plans. Orgabio effectively enhanced its manufacturing capacity, leveraging its seven manufacturing lines to increase utilisation from 70% in 1QFY24 to over 80% in 2QFY24. With the addition of new clients and heightened orders from existing clients, we estimate Orgabio to achieve a record-high utilisation rate of >90%, until the deployment of two additional lines at its new plant by 2QFY25F, constituting a capacity expansion of c.29%. This expanded capacity will significantly reduce delivery lead times to customers and accommodate various stock keeping units or SKUs requested by clients. Moreover, upon the completion of the new plant, there will be a remarkable 163% increase in production area, enabling the accommodation of up to 10 manufacturing lines to facilitate future growth.

• Enhanced efficiency and higher ASP, driven by a more favourable product mix, have strengthened Orgabio’s profit margin. To further enhance margin, the company is expanding into higher-end products, such as those incorporating dairy milk powder instead of non-dairy creamer. This strategic pivot towards premium offerings aims to elevate the overall group margin and aligns with evolving consumer preferences for healthier food choices.

• Earnings forecasts and valuation. We forecast a 3-year earnings CAGR of 256% and ascribe 14x target P/E on FY25F earnings to derive its FV of MYR0.54. This target P/E is deemed conservative compared to peers' average of 20x, despite Orgabio's above-average earnings growth. Key risks: Market demand fluctuations, raw material price fluctuations, loss of key customers, operation risk and forex volatility.

Source: RHB Research - 21 May 2024