Investment Highlights

• We maintain BUY on Malayan Flour Mills (MFM) with an unchanged fair value of RM1.00/share. Our fair value of RM1.00 implies an undemanding FY23F fully diluted PE of 10x. We ascribe a 3-star ESG rating to MFM.

• Dindings Poultry Development Centre, a 51% joint venture of MFM has been issued a notice of proposed decision for allegations of feed meal price fixing, by MyCC (the Malaysia Competition Commission).

• The financial penalty can be up to 10% of the company’s turnover. The final decision will be announced in October 2022.

• We estimate that MFM’s poultry unit recorded a turnover of RM716.7mil in FY20 and RM860.1mil in FY21. Hence a 10% penalty would translate into RM157.7mil.

• Based on MFM’s 51% shareholding in the poultry division, this would imply a cash outflow of RM80.4mil. This would wipe out MFM’s estimated net profit of RM84.7mil for FY22E. We draw comfort from the fact that the penalty, if any, is one-off and MFM’s net profit would recover in FY23F.

• Also, MFM’s flour division is expected to sustain its profitability on the back of lower wheat costs. We forecast the flour unit to record an EBIT of RM206mil in FY22E vs. RM187mil in FY21. MFM has flour operations in Vietnam and Malaysia.

• Hence in spite of the risk of a financial penalty, we are keeping our recommendation on MFM. Excluding the financial penalty, if any, we believe that the poultry unit would swing into the black in FY22E. This is expected to be underpinned by higher demand. We believe that MFM’s poultry processing plant in Lumut is currently operating at a utilisation rate of 60% currently.

Source: AmInvest Research - 8 Aug 2022