Site tour to “Land Below the Wind”
- From 13-15 Jul 2022, we hosted a consumer-based site tour to Kota Kinabalu, Sabah for domestic institutional investors.
- We visited four listed companies, two of which are under coverage (QL Resources and CCK) while two are Not Rated (Kim Teck Cheong Consolidated Berhad and Swift Logistics). We also had the opportunity to visit Desa Milk Farm, a Kota Kinabalu-based dairy farm (private company).
- We gather that demand for consumer products remains fairly resilient, backed by the inelastic nature of demand. This is despite broad-based price hikes to pass on higher input costs and operating expenses.
- In the consumer space, our preferred picks are QL Resources and Farm Fresh due to their strong brand equity and defensive nature of demand. We also have an Add call on CCK.
Company visit 1: Desa Cattle Dairy Farm (Not Listed, Non Rated)
Who are they?
- We visited Desa Dairy Farm, an integrated dairy production farm located in the foothills of Mount Kinabalu, Sabah. The farm is owned by Desa Group of Companies, a Government Linked Company (GLC) that is wholly-owned by the State Government of Sabah.
- We understand that Desa Dairy Farm does not receive any subsidies from the state government. Revenues are generated from the sale of dairy goods to both end-consumers and HORECA customers in Sabah and Sarawak (areas accessible by roads via Sabah).
- Desa Cattle Dairy Farm spans across 199 hectares, and its milking cows are from the Holstein Friesians breed. We understand that the location of Desa’s farm at 5,000 ft above sea level is conducive for Holstein Friesian cows to have high milk yields.
- Its annual milk production stands at 900,000 litres of milk per year. Its products are mainly sold under its own-brand, Desa, while its product portfolio ranges from fresh pasteurized cow and goat milk-based drinks to downstream milk-based products (i.e. yoghurt, cheese, gelato, etc).
Details of the visit
- Desa Dairy Farm has an estimated 200 milking cows that produce milk currently out of c.600 cows at its farms, with total upstream capacity (milking cows) of 320 (assuming fully utilised).
- As no preservatives are added, the average shelf life of its products is between 7-10 days. In terms of product selling prices, we noticed that Desa milk is slightly cheaper (5% to 10% discount) compared to other brands in Peninsular Malaysia.
- We gathered that Desa Dairy Farm has an average milk yield per cow per day of 28-30 litres, and up to 40 litres for some of the top producers on the farm. We note that this is higher than Farm Fresh’s average milk yield in Malaysia (FY3/22: 14.5m litres per day), and Desa Cattle Dairy Farm is of the view that its milk yield could be higher than average estimated milk yields of dairy farms in Australia and New Zealand.
- We gather that the higher average milk yield for Desa Dairy Cattle farm is attributed to: i) conducive cold temperate climate of the location (suitable for Holstein-Friesians), ii) usage of tailor-made feed (the cows are fed with quality hay, grain-based dairy feed and green grass from pasture land) and iii) 100% adoption of a modern cow barn system and milking technologies.
- Its milking technology allows Desa Dairy Cattle Farm to conduct three milking sessions per day, resulting in c.60-70% higher milk yields. As a comparison, Farm Fresh Berhad conducts two milking session per day. Each female cow at Desa Dairy Farm is allowed to be milked for about 7-8 lactation cycles with its peak milk production approximately 3 to 6 weeks after parturition. Thereafter, it would need to seek approval from the Department of Veterinary Services to sell the cows.
- Desa Dairy Cattle Farm practices artificial insemination to ensure it has the best breed of cows. Through artificial insemination, it aims to grow its number of U.S. breed of Holstein-Friesian female dairy cows which typically have bigger and stronger legs that can thrive in the high elevation/hilly landscape, in addition to having better milk yield. Desa Dairy Cattle Farm does not keep its male cows (bull) at the farm, it transports them to another farm to fatten up and then sells them to a slaughterhouse.
Outlook and growth plans
- As demand for fresh milk continues to outstrip supply (90% of supply is produced in-house with the remaining 10% sourced from the Sabah veterinary department), the company is looking into potential partnerships with contract farmers to increase its raw milk supply. However, contract farming comes with a set of concerns such as the quality of milk produced by the contract farmers (due to insufficient training and lack of equipment, as well as fraud (diluting the milk with water).
- The company is also adding a new barn, which will further increase its upstream capacity to 450 milking cows from c.200 by end-2H22. This will allow the company to increase its milk output beyond the current 900,000 litres daily.
- The company does not discount the possibility of setting up an alternative milk processing facility in Peninsular Malaysia, in the event that it plans to penetrate this market. We understand that it is not economical to send finished milk products from Sabah to Peninsular Malaysia.
