• MYR0.62 FV based on 13x FY25F P/E. At MYR0.50/share, Agricore CS is set to raise MYR25.9m (202.8m shares) from its IPO, mainly to fund its working capital and expand storage capacity to enhance the efficiency of its business operations and increase market presence in the food ingredients industry. Future earnings (3-year CAGR: 21.2%) should be supported by aggressive expansion plans to drive sales and margin expansion through economies of scale. The IPO price implies a 10.5x FY25F P/E.

• Growing emphasis on food security. AGRICOR holds a prominent position as one of the leading food ingredient suppliers in Malaysia. We believe the Government's increasing emphasis on food security, in tandem with the country’s growing population and economic landscape, is poised to support sustained demand for food ingredients given their crucial role in food manufacturing and preparation. Additionally, the group’s current market share of only 1.2% indicates significant room for further market expansion.

• Driving growth through expansion. AGRICOR has earmarked 10.3% of its IPO proceeds (MYR2.7m) to rent a new storage facility (slated to commence operations in Oct 2024) in the central region to increase capacity (+39%). Additionally, 73.2% (MYR 18.9m) will be used to increase inventory levels, ensuring sufficient and readily available stock to meet customer demand. The additional capacity will enable the group to expand its customer base, achieve economies of scale, and increase its market share. Furthermore, the new storage facility will enhance operational efficiency by providing quicker delivery lead times to customers, thereby improving competitive advantage.

• Preferred food ingredients distributor. AGRICOR stands out with various certifications (ISO 9001:2015 Quality Management System, MeSTI, Halal standards, HACCP System, and GMP System) thanks to its compliance with internationally recognised food quality and safety standards. These certificates instill confidence in its customers and end-consumers, enhancing the reputation of its brands in the food ingredient industry. With a vast supplier network (spanning 80 suppliers across 15 countries), AGRICOR is able to offer a diverse product portfolio of 69 store keeping units (SKUs), effectively meeting the sourcing needs of its diverse customer base. Additionally, the group is able to maintain a long relationship with its suppliers thanks to its loyalty, timely payments, and commitment to fulfilling purchases.

• Forecasts and valuation. We are projecting a 3-year earnings CAGR of 21.2% for AGRICOR, mainly driven by its expansion plans and growing working capital. The stabilisation of raw material prices and expectations of softer USD expectations also bode well for the group. We derive a FV of MYR0.62, based on an ascribed P/E of 13x on FY25F earnings. The valuation is largely in line with the Bursa Malaysia Small Cap Index as there are no direct local or international peers available for comparison. Key risks include fluctuation in raw material prices and delay in expansion plans.

Source: RHB Securities Research - 7 Jun 2024