Lower cost cheer for Farm Fresh earnings

CGS-CIMB Research said FFB’s earnings appear to have troughed and bottomed out in the fourth quarter of the financial year 2023.

PETALING JAYA: Increased selling prices and lower raw material costs are expected to improve Farm Fresh Bhd’s (FFB) earnings sequentially, going forward.

Following the integrated dairy company’s presentation at the CGS-CIMB Consumer Conference 2023, CGS-CIMB Research said FFB’s earnings appear to have troughed and bottomed out in the fourth quarter of the financial year 2023 (4Q23).

“It will also be due to lower farmgate prices for raw milk in Australia (down by 4% year-on-year (y-o-y)) and lower whole milk powder prices (down by 24% y-o-y in August).

“It will take a few quarters before the full impact of the above will be seen in reported profits.”

The research house said management expects to revert to its previous earnings trajectory, which it interprets as heading back above RM100mil per annum in net profits, the research house said in a report yesterday.

CGS-CIMB Research said while lower raw material costs for both farmgate (fresh milk) and whole milk powder are expected to drive down costs in the coming quarters, there will be a lag in these costs filtering through inventories.

“Management has also been hedging FFB’s dollar exposure with ringgit-to-dollar rates of RM4.53 to RM4.55 locked in till the end of 2023.”

CGS-CIMB Research added that FFB has been locking in increased volumes of whole milk powder as prices decline to multi-year lows. Starting from July, Australian farm gate prices have been about 3.8% lower than in the first half of 2023.

“In 1Q24, FFB made a conscious decision to accelerate the drawdown of its milk inventories in Australia. This contributed to the margin compression at its Australian operations,” the research house said.

“In the first half of 2024, FFB will launch butter products, both under the Farm Fresh brand as well as its recently-acquired St David Dairy brand. These will be aimed at both the domestic and export markets. FFB’s butter products will do away with single use plastics.”

Moreover, the research house noted that FFB is on track to launch consumer packaged goods ice-cream products in the first quarter of 2024.

“It expects to grow this capacity further in 2026 when production shifts to its Enstek plant. FFB’s goal is to capture 5% of the Malaysian ice-cream market in two years,” CGS-CIMB Research said.

CGS-CIMB Research has maintained a “hold” call on FFB with an unchanged target price of RM1.37.

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