We maintain our BUY recommendation on Malayan Flour Mills (MFM) with an unchanged fair value of RM0.89/share. Our fair value implies an FY20F PE of 14.5x. MFM is currently trading at FY19E fully diluted PE of 14.2x and FY20F fully diluted PE of 12.2x.
MFM’s 1QFY19 net profit was within our forecast. The group’s net profit surged to RM19.9mil in 1QFY19 from RM1.6mil in 1QFY18 on the back of a recovery in earnings of the flour and poultry divisions. MFM’s effective tax rate was also low at 15.3% in 1QFY19 due to tax incentives in Vietnam.
Flour accounted for 92.2% of MFM’s EBIT in 1QFY19 while poultry made up the balance 7.8%.
Revenue of the flour division improved by 13.8% YoY to RM469.3mil in 1QFY19. We believe that this was due to higher selling prices and demand for non-GP (general purpose) flour products such as self-raising flour.
EBIT margin of the flour unit rose to 4.7% in 1QFY19 from 1.4% in 1QFY18 supported by the increase in selling prices and lower wheat costs. According to Bloomberg, price of soft red winter wheat slid by 6.8% to US$4.9903/bushel in 1QFY19 from US$5.3523/bushel in 1QFY18.
Revenue of the poultry division climbed by 11.3% YoY to RM188.2mil in 1QFY19 on the back of an increase in sales volume. We believe that MFM’s poultry division has recovered from the IBH (Inclusion Body Hepatitis) disease, which afflicted its chickens last year.
EBIT margin of the poultry division inched up to 1.0% in 1QFY19 from 0.9% in 1QFY18 as a fall in the cost of feedmeal was partly offset by lower selling price of live birds. Prices of soybean and corn, which are used to produce feedmeal, are in the doldrums currently due to a global glut.
According to Bloomberg, average price of US corn slipped by 5.8% to US$3.8836/bushel in 1QFY19 from US$4.1228/bushel in 1QFY18. Average price of US soybean eased by 9.2% to US$9.3057/bushel in 1QFY19 from US$10.2461/bushel in 1QFY18.
MFM’s net gearing stood at 70.7% as at end-March 2019 compared with 116.7% as at end-Dec 2018. The decline in net gearing was due to an expansion in shareholders’ funds resulting from the rights and RCULS issues, which were completed early this year.
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