4QFY22: Cessation Of Sales Masks Decent Performance
Sales were flattish due to the cessation of sales to third parties by Farm Fresh’s
Australia farm. Margins were lifted by ASP revisions as Farm Fresh delivered on its
earnings. Farm Fresh has indicated its willingness to defend its margins amid spiralling
input costs. We continue to like Farm Fresh for its exciting earnings growth and
attractive valuations that could re-rate further. Maintain BUY with a target price of
RM1.82.
RESULTS
• 4QFY22 earnings largely within expectations. Farm Fresh registered a 4QFY22 net profit
of RM39.5m. Cumulatively, FY22 core profit was +18% yoy at RM85.6m. Headline earnings
included RM7.5m of one-off items such as IPO expenses (-RM8.0m), redundancy costs (-
RM3.9m) and reallocation of tax reversal (RM10.5m) (FY21: -RM36.2m). Core earnings
were largely within expectations, representing 105% of both our and consensus’ full-year
forecasts.
• Malaysia sales offset absence of third-party sales. 4QFY22 sales were largely flattish on
a yoy basis at 0.4%. This is attributed to Malaysia operations (+6.2% yoy) offsetting a
reduction in Australia revenue (-46.7% yoy) due to the ceasing of raw milk sales to third
parties and the downsizing of its fruit jam business (that was completed in 3QFY22). We
expect its fortified fresh milk to make headways into the untapped powdered milk segment to
supplement its organic growth within its existing ready-to-drink (RTD) segment.
• Margins improve off ASP hike in the preceding quarter. 4QFY22 gross margin improved
by 1.0ppt to 28.6% on a yoy basis. This was largely due to the ASP hike of 5% in its RTD
products in 3QFY22. Farm Fresh has indicated that it is looking to raise its ASPs for its
chilled RTD products sold in Malaysia and Singapore by an average of 5-8% as it attempts
to counter higher input prices. We believe this should help sustain its margins going forward.
STOCK IMPACT
• Product launch aimed at entry into yet-to-be-tapped and sizeable market. Farm Fresh
is due to launch growing-up milk based on a fortified fresh milk formula for children aged 3 to
12 years old. This would take aim at the currently untapped RM2.3b powdered milk segment
(existing presence in RTD milk segment is valued at RM2.1b). Although the new fortified
fresh milk is not in powder form, it aims to serve the same purpose as specialty milk for
children.
• Raised ASP alleviates input cost concerns. Alfalfa hay and maize appears to have
remained elevated, bucking the trend of other soft commodities softening over the months,
which has been in part due to the Russia-Ukraine war. This has been two quarters of
elevated input cost post Farm Fresh’s ASP hike in 4QCY21 (3QFY22). But Farm Fresh has
already indicated it is looking to raise its ASPs by 5-8% for its chilled RTD products. Given
Farm Fresh’s superior operating margins despite its products being priced at a discount to
its peers, we are confident over its ability to defend its market share and maintain overall
competitiveness going forward.
EARNINGS REVISION/RISK
• No changes to earnings. Downside risks: Elevated raw material prices and milk quality and
yield.
VALUATION/RECOMMENDATION
• Maintain BUY but with a higher target price of RM1.82 (from RM1.60) as we roll over our
valuations to 2023 from FY23. Our target price is pegged to 30.5x FY23F PE. The PE peg is
derived from the overall Asia dairy average PE to a growth ratio of 1.7x Farm Fresh’s three-year earnings CAGR of 17.9%. We like Farm Fresh for its: a) attractive growth outlook with a
three-year earnings CAGR (FY20-23) of 17.9% vs Malaysia – Consumer (7.2%) and Asia
Developed – Dairy (3.1%); and b) far superior operating efficiency – average operating
margins of 20.6% for FY19-21 far outperformed its direct peer Dutch Lady’s 13.6%.
• We believe should Farm Fresh be able to make headway into key export markets and
sustain its margins amid spiraling costs, it could re-rate to command premium valuations
closer to those of consumer darlings such as Nestle (51.6x) and QL Resources (48.8x).