• 3QFY24 net profit of RM20.4m brought 9MFY24 net profit to RM39.6m (-17% yoy), at 47%/61% of our/Bloomberg consensus FY24F estimates.

• We believe the rebound in its gross margin in 3QFY24 will sustain through to FY25F and support a >RM100m net profit in FY25F.

• Maintain Hold, with a GGM-based target price of RM1.37, implying a FY25F P/E of 22.2x.

Margin rebound continues on higher revenues and lower costs

• Farm Fresh’s (FFB) 3QFY3/24 net profit of RM20.4m (+60% qoq) brought 9MFY24 net profit to RM39.6m (-17% yoy). Revenues expanded 7% qoq in 3Q on the back of a 4% qoq increase in volumes to 27.6m litres and a 2% qoq increase in average sellling prices.

• Also helping revenue expansion in 3QFY24 was the addition of Sin Wah Ice Cream’s (70% stake) revenues for two months. Farm Fresh’s gross margin improved 2.2% pts qoq to 28.5% in 3QFY24. This was fuelled by the price increases instituted in July 2023 as well as lower raw material costs, especially whole milk powder prices (-14% qoq).

Takeaways from its 3QFY24 results call today (28 Feb)

• Management has secured whole milk powder (WMP) supplies up to Jun 2024 at an average price of RM3,169/mt, and hedged FFB’s US$ requirements up to end-Mar 2024 at c.RM4.54/US$. While WMP prices averaged c.RM3,500/mt in Feb 2024, management sees these prices as more normal than the >RM4,000/mt levels in 1H2022 which impacted FY23 costs, and is happy to hedge positions at or below these levels. Management feels the biggest risk from a cost perspective would be a sharply weaker ringgit. It felt that at the current RM/US$ level of RM4.75-4.80, FY25F gross margin would be impacted by 0.4-0.5%.

Heightened delivery needed to rerate further

• We maintain our Hold call on Farm Fresh. Our GGM-based target price of RM1.37 has factored in a sustainable ROE of 16.5% (FY26F: 16.4%) vs. our FY24F ROE forecast of 12.6%. We see its current valuation of 22x CY22F P/E as fair vs. its closest peer Fraser & Neave’s 21x. An acceleration in margin recovery and revenue growth are potential re-rating catalysts and upside risks to our Hold call. Failure to sustain the current net profit momentum would be a key downside risk.

Source: CGS-CIMB Research - 28 Feb 2024