Farm Fresh churns out earnings growth

High demand and better pricing to sustain company

PETALING JAYA: Strong consumer demand and better product pricing will drive Farm Fresh Bhd’s earnings growth over the medium term.

The dairy company, which has devised expansion plans in its upstream and mid-stream segments to cement its leadership position in the industry, is expected to register a three-year compounded annual growth rate (CAGR) of 23% in net profit from its financial year ended March 31, 2021 (FY21) to FY24.

The growth estimate by Maybank Investment Bank Research (Maybank IB) was based on strong revenue and healthy margins.

The research house recently initiated coverage on Farm Fresh with a “buy” call, with a target price of RM1.95, pegged to 2023 simple weighted average price-earnings ratio (PER) of its domestic dairy-related peers of 29 times.

Maybank IB noted Farm Fresh’s recent 5% product price hike for its chilled ready-to-drink (RTD) and ultra-high-temperature processing (UHT)/ambient milk categories, which collectively accounted for 76% of revenue in FY21, should underpin growth.

Farm Fresh’s top-line growth would also be supported by the group’s progressive growth in processing milk volume from FY22-FY24, the brokerage said.

In total, it projected a three-year revenue CAGR of 15% from FY21-FY24 for Farm Fresh, driven primarily by a favourable demand outlook across its range of products.

“With strong demand expected for its product range of both dairy and non-dairy products, we estimate that its annual processing volume in million litres of milk will increase by 10%, 15% and 19% in FY22, FY23 and FY24 respectively, in tandem with Farm Fresh’s planned processing facility expansion plans in Malaysia and Australia.

“With this, we expect group utilisation rate to also grow from 56% to 66% from FY22 to FY24,” Maybank IB said.

“In FY22, FY23 and FY24, we are projecting for average blended product prices to grow by 2.5%, 2% and 3.0%, respectively, after accounting for Farm Fresh’s product price hike of 5% for its chilled RTD milk category in Sep 2021, followed by another 5% product price adjustment for its UHT/ambient products in December 2021, and expectations for increased sales volume from higher priced stock-keeping units (SKUs), for example, plant-based products,” it added.

Farm Fresh has a diverse portfolio of dairy and non-dairy products, which total around 135 SKUs, the brokerage noted, adding that the company also has the largest portfolio of locally manufactured dairy products among the domestic integrated dairy companies.

“Farm Fresh provides exposure to the largest homegrown dairy company and integrated producer of dairy products made from fresh raw milk in the country,” Maybank IB said.

It noted that as at September 2021, Farm Fresh has grown into the second largest player in the total RTD milk (chilled and ambient) category with a market share of 18% from 3% in 2015.

As at end 2021, Farm Fresh had a cash balance of RM12mil, with a total gross short-term debt of RM142mil and long-term debt of RM107mil (including total lease liabilities), which resulted in a net debt position of RM237mil.

The company’s net gearing increased from 39% in FY19 to 98% in FY21, largely from increased borrowings undertaken to fund various expansions in its dairy farms and production facilities.

“Note that Farm Fresh issued a RM200mil sukuk in May 2021 where part of the proceeds was used to pay off its term loans, hire purchase liabilities, bank overdraft, revolving credit and the loan from a shareholder totalling RM130mil.

“Hence, we expect Farm Fresh to turn net cash in FY22, followed by a 4% net gearing in FY23-FY24,” Maybank IB said.