Review

• Farm Fresh Bhd’s (FFB) 9MFY24 core net profit of RM37.0mn accounted for 61% and 53% of our and consensus full-year estimates, respectively. However, we deem the results to be within our expectations as we expect the group to maintain it record high margin for 4QFY24.

• No dividend was declared for this quarter.

• YoY, 9MFY24 revenue surged 27.13% to RM595.4mn, thanks to improved HORECA and commercial UHT sales. EBIT improved marginally by 0.2% due to higher administration cost during acquisition of Sin Wah and Inside Scoop. We believe that the recovery in GP margin to 22.2% was due to the higher sales.

• QoQ, 3QFY24’s EBIT surged 53.2% in tandem with the rose in revenue by 6.7%. Core EBIT of 3QFY24 rose 49.2% to RM28.5mn, chiefly contributed by lower price of raw materials, rise in ASP of certain UHT products back in July-2022, which evidently shown by 4.7ppt QoQ improvement in GP margin to 31.0%.

Briefing Highlights

• GDT whole milk price in 1QCY24 slightly inching up but the low-price inventory has yet to deplete, with a remaining 2-month inventory left. All in, we foresee there will be a savings in cost which translate into better margin (Whole milk power stood at c.RM3200/MT year to date while FFB still have a lower price inventory of RM3,169/MT, which is lower than the market price).

• We gather that the contribution from Sin Wah was c.RM15mn in 9MFY24. Meanwhile, FFB is eyeing to achieve 5% market share in CPG ice-cream by 2025 (whereas the CPG market is dominated by a few major players such as Nestle, Unilever, F&N and etc at this juncture)

• There will be 2 new product launches in FY24, which are consumer package goods ice cream and juniors cultured milk, tentatively by 1HFY24. As of now, FFB has launched 3 new SKUs in FY24

Outlook

• We are optimistic about the acquisition of Sin Wah and Inside Scoop given the cost synergies. FFB will utilise the technology from Inside Scoop and distribution channel of Sin Wah to accelerate its progress in entering the CPG market. We anticipate the expansion could lead to a further improvement in its margins latest by FY25 (Sin Wah GP margin currently stands at c.40% while net profit stood at 17%).

Impact

• No change to our earnings forecasts.

Valuation

• We downgrade the stock to Hold with an unchanged TP to RM1.52/share based on 28x CY24 EPS following the recent increase in share price.

Source: TA Research - 29 Feb 2024