• Maintain BUY, new MYR1.72 TP from MYR1.75, 11% upside with c.1% FY24F (Mar) yield. Farm Fresh’s FY23 results were lower than estimated, due to its heavy production cost pressures. We view the gradual easing of cost pressures, its cost pass-through, and new capacity coming on-stream to be the key factors driving its earnings recovery in FY24F. We continue to like FFB for its established brand equity and robust market share gains – underpinned by quality product offerings as well as its ambitious expansion plans to facilitate deeper market penetration.

• FY23 results below expectations. Core net profit of MYR57m (-17% YoY) met only 83-84% of our and consensus forecasts. The negative deviation could be attributed to a weaker-than-expected GPM, which was dragged by high production costs. Post results, we cut FY24F earnings by 11% but keep our FY25 forecast materially unchanged. We also introduce earnings (+20% YoY) and other metrics for FY26 in this report. Our TP drops to MYR1.72 (includes a 6% ESG premium), which implies 35x FY24F P/E – at a discount to the valuation ascribed to its larger-cap consumer staple peers.

• Results review. YoY, FY23 revenue jumped 26% to MYR630m, driven by encouraging market share gains, new product launches, and contributions from its school milk project. That said, FY23 gross profit only grew by 10% YoY as GPM slipped 3.4ppts to 23.8% on higher raw material costs and unfavourable FX rates. Also, higher wages and electricity costs dragged on profitability. QoQ, 4QFY23 revenue was flat at MYR161m. Meanwhile, GPM eroded sharply to 20.3% due to the aforementioned cost pressures. Correspondingly, 4QFY23 net profit slumped 51% QoQ to MYR8.3m.

• Outlook. After these disappointing numbers, we believe the worst could be over for FFB. The group is increasing the selling prices of its chilled products from July onwards, effectively narrowing the gap with competitors, which have already raised their selling prices more aggressively. In addition, farmgate milk prices are expected to undergo a moderation in the upcoming season starting July, which will spur its margin recovery significantly, depending on the quantum. Meanwhile, the capacity increase in its existing plant and new Taiping plant will be timely for it to ease production constraints and meet strong market demand – another key earnings driver in FY24F (we expect net profit to grow 58% YoY). Downside risks to our call include a sharp rise in input costs and major delays in expansion.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 31 May 2023