• Keep BUY, with new MYR2.11 TP from MYR1.88, 15% upside. We believe Farm Fresh will continue to leverage on its established brand equity to penetrate more markets, thereby fuelling the relentless topline growth. Meanwhile, easing raw material prices and favourable FX will translate to more margin expansion going forward, in our view. Our positive stance is premised on the visible and long runway for growth, more consistent earnings delivery, and management’s ambitious vision, which should warrant a valuation premium.

• Sowing the seeds of diversification. FFB recently launched its in-house consumer-packaged goods (CPG) ice cream brand – Cream Hauz – and our ground checks suggest the initial reception has been positive (see page 3). With more products in the pipeline, the group aims to capture a 5% share in CPG ice cream markets worth >MYR1.2bn by 2025F. FFB’s strategy to diversify its offerings in the dairy product markets (by leveraging on its brand equity and healthier option value) could bear significant fruit once again. Previous major launches – Yarra by Farm Fresh and Farm Fresh Grow at end 2022 – to penetrate the ultra-high temperature or UHT and growing-up milk markets were prolific in driving rapid topline growth in recent years.

• Much more on the plate. FFB is also aiming to grab a share in the lucrative chocolate malt beverage markets worth MYR1bn, as the ongoing consumer boycott action has opened a rare window of opportunity. It launched a powder variant in July and there are plans to roll out ready-to-drink or RTD products in 2025. Butter products will be the new addition to the hotel, restaurant, and café/catering or HORECA offerings (coming soon) to sustain this segment’s strong sales growth – it now accounts for c.30% of total sales (2021: 17%). Away from Malaysia, FFB recently commenced production in the Philippines after having established a presence and brand-built via imports earlier.

• Cost tailwinds to be reflected soon. With GPMs staying >30% in the last three quarters, there could be more upsides going forward. This is as the lower-priced whole milk powder and raw milk (-5% and -11% vs 1QFY25 (Mar) numbers) are reflected in subsequent quarters. Additionally, the stronger MYR will translate into cheaper sourcing costs, as >40% of COGS is imported content. We raise FY26F-27F earnings by 5% each to factor in our revised in-house FX assumptions and higher minimum wage. Correspondingly, our DCF-derived TP rises to MYR2.11 (inclusive of a 6% ESG premium), which implies 30x 2025F P/E, or +1SD over its 5-year mean.

• Risks to our recommendation include a sharp rise in input costs and major delays in expansion plans.

Source: RHB Securities Research - 29 Oct 2024