Malaysia’s largest fresh milk producer
? We initiate coverage on Farm Fresh, Malaysia’s largest producer of dairy
goods based on fresh milk, with its vertically integrated grass-to-glass model.
? We view FFB as a strong proxy towards rising fresh milk consumption in the
Asian region, backed by its strong R&D culture and growing product portfolio.
? We project FY22-25F core net profit CAGR of 22.6%, backed by: i) higher
demand for milk, ii) expansion to new markets, and iii) capacity expansion.
Leading position in Malaysia’s RTD milk category
According to Farm Fresh Berhad (FFB), it is Malaysia’s largest integrated producer of dairy
products based on fresh milk. As at end-FY22, Farm Fresh is ranked 2nd in terms of market
share (sales volume) in Malaysia’s (23%) ready-to-drink (RTD) milk category and 1st in the
chilled segment. It has four in-house brands (Farm Fresh, Yarra Farm, Henry Jones and
Master Barista), while we estimate that FFB has the largest portfolio of locally
manufactured dairy products in the Malaysian market (c.135 SKUs currently).
Practices farm-to-glass model, a differentiating factor vs. peers
FFB’s vertically integrated supply chain is a key differentiating factor vis-à-vis others in the
local dairy industry. While most local dairy producers are fully dependent on third-party milk
supply, FFB adopts a “farm-to-glass” model, with in-house facilities across its entire supply
chain. FFB currently has a total of six dairy farms (we estimate supply of up to 32.7% of its
raw milk requirements in FY23F) and three processing centres in Australia and Malaysia,
backed by its multi-channel distribution network that includes its unique in-house home
dealer programme (stockist/dealers: 30.0% of FY22 sales).
Growth profile backed by demand growth and capacity expansion
FFB’s growth profile is backed by capacity expansion plans across its integrated supply
chain. This allows FFB to cater to demand growth from current operating markets
(cementing its leadership position) and ventures into new markets (Hong Kong, Indonesia
and the Philippines). We believe that FFB’s strong R&D culture sets it apart, allowing it to
continuously innovate and launch new products to cater for larger consumer group with
various preferences and affordability level. We are not overly concerned about rising input
costs as we believe FFB’s commanding share of the local market and superior product
quality allow it to raise selling prices to pass on any additional costs. Overall, we project
FFB posting a robust 3-year CAGR core net profit growth of 22.6% for FY22-25F.
Initiate with Add rating and TP of RM1.83
We initiate coverage on FFB with an Add rating and TP of RM1.83 (28x CY23F P/E, in-line
with target CY23 P/E of domestic peers involved in dairy-based beverages). We like FFB
as a proxy to growing demand for fresh milk based goods in Asian region, backed by its
strong growth profile (3-year FY22-25F EPS CAGR of 22.6%). Re-rating catalysts: betterthan expected sales volume and margin expansion. Downside risks: surge in input costs
and weaker-than-expected sales volume.