Investment Highlights

• We initiate coverage on Malayan Flour Mills (MFM) with a fair value of RM0.89/share. Our fair value for MFM is based on an FY19F fully diluted PE of 15x.

• Our PE assumption of 15x is 20% below the poultry sector’s (eggs and broilers) average PE of 18.8x. From FY12 to FY17 (disregarding FY18’s poor earnings), MFM’s PE ranged from a low of 8.7x to a high of 34.9x. Average PE was 15.9x.

• MFM’s FY19F basic PE is forecast to be 9.4x compared with CAB Cakaran’s 12.8x and PWF Consolidated’s 10.0x. MFM’s fully diluted FY19F PE is estimated to be 12.0x.

• MFM is primarily involved in the flour milling and poultry businesses. In the poultry space, MFM produces broiler chickens. MFM’s competitors in the broiler business are Huat Lai Resources (privatised) and CAB Cakaran. MFM’s competitors in the flour milling business are PPB Group’s Federal Flour, Interflour Holdings and Kuantan Flour Mills.

• MFM is a BUY for the following reasons: 1. MFM’s fully diluted PEs of 12.0x for FY19F and 10.3x for FY20F are undemanding. A decent consumer-related company trading at low PE valuations is a rare find nowadays. MFM’s dividend yields are forecast at 4.2% for FY19F and 4.9% for FY20F. 2. After a weak FY18, MFM’s earnings are expected to recover in FY19F. We forecast MFM’s net profit to improve by 293.8% in FY19F and 16.9% in FY20F as operations normalise and contribution from the new poultry and aqua feed plants come in. MFM’s poultry division was hit by a disease and falling selling price of live birds in FY18. The group’s flour division was affected by high wheat costs in Malaysia in FY18. 3. MFM is expected to be one of the largest integrated poultry players in Malaysia in FY20F upon the completion of its poultry processing plant in Lumut in 3QFY19. This is expected to sustain MFM’s earnings growth and operating profit margin in the long term. With an installed production capacity of 240,000 of chickens per day, MFM would entrench its position as the biggest producer of broilers in the country. MFM would be involved in almost every segment of the value chain from the rearing of day-old chicks to the production of broilers.

• MFM’s balance sheet is expected to be cleaner after the RM220mil rights and RCULS issues. We forecast net gearing to decline to 88.6% as at end-Dec 2019 from 116.7% as at end-Dec 2018.

Source: AmInvest Research - 11 Mar 2019