• Still BUY, new MYR1.75 TP from MYR1.85, 12% upside. 1HFY23 (Mar) results disappointed on compressed GPMs. Notwithstanding the near-term earnings weakness, we believe investors should appreciate and value the encouraging sales growth momentum. Essentially, management’s focus on market penetration via new product launches will create long-term value, in our view, as consumers tend to be sticky to Farm Fresh’s products. Hence, we believe earnings growth will eventually resume when the cost pressures recede. We remain excited over the growth prospects.

• 1HFY23 results below expectations. The core net profit of MYR28m (-17% YoY) met only 31-32% of our and consensus’ forecasts – this was attributable to higher-than-expected raw material costs. Post results, we cut FY23-25F earnings by 23%, 10%, and 8% and our DCF-derived TP to MYR1.75 (inclusive of a 6% ESG premium). The TP implies 34x P/E 2023F, which is at a discount to FFB’s large-cap consumer staples peers.

• Results review. YoY, 1HFY23 revenue jumped 19% to MYR306m thanks to the positive traction of new products and rising contribution from the School Milk Programme (SMP). GPM was flattish at 25.3%, as the turnaround in Australia operations was offset by a significant hike in raw material costs. Noticeably, 1HFY23 selling and distribution expenses spiked 82% on higher transportation costs related to SMP and advertising & promotions (A&P) expenses to complement new product launches. QoQ, 2QFY23 sales grew 13% to MYR162m on the abovementioned reasons and higher contributions from the Australia unit. Core net profit fell 33% to MYR11m, dragged by a slip in GPM (-1.7ppts), higher A&P expenses, and higher effective tax rate or ETR.

• Growth prospects remain exciting. We expect earnings to rebound quickly, taking into account the normalisation in milk powder prices (Figure 2) and full effects of price increases in August whilst new capacity (+25- 30%) should come on stream by December to ease supply constraints and meet market demand. The group launched Farm Fresh Grow in October, which has received encouraging reception whilst the Yarra By Farm Fresh UHT range will be introduced in November, a key move for FFB to grow its market share in the larger-sized sub-segment. The ensuing further market penetration, which is management’s current focus, bodes well for FFB, considering the brand’s high retention rate, ie new consumers are likely to stick to its quality products. Hence, earnings growth will eventually resume when the cost factors normalise, in our view.

• Risks to our recommendation include a sharp rise in commodity prices and major delays in expansion plans

Source: RHB Research - 24 Nov 2022