• U/G to BUY from Neutral with higher MYR1.51 TP from MYR1.20, 15% upside. While Farm Fresh’s 1HFY24 (Mar) results missed expectations, we take the GPM rebound positively. Sequential earnings should improve further on cost tailwinds and solid sales growth momentum. Longer-term growth prospects are also exciting, with various expansion plans lined up to extend its outreach in capturing rising dairy consumption. We also like the company for its entrenched brand equity and ambitious management team.

• 1HFY24 results below expectations. Core net profit of MYR20m (-36% YoY) met only 27-29% of our and consensus’ forecasts due to the milderthan-expected margin recovery. Post results, we cut FY24F earnings by 11% but leave FY25-26F numbers materially unchanged. Notwithstanding, we lift our DCF-derived TP to MYR1.51 (inclusive of a 6% ESG premium) after tweaking our risk premium to account for the improving outlook. Our TP now implies 27x P/E FY24F, which is at a sizeable discount to large-cap consumer staple peers.

• Results review. YoY, 1HFY24 revenue surged 25% driven by healthy volume growth in chilled (+10%) and UHT (+15%) segments, on the back of higher food service and hotel industries (HORECA) sales and the easing of capacity constraints respectively. 1HFY24 GPM was 3.1ppts lower due to input cost pressures and dilution of its Australia operations in 1QFY23. 2QFY24 revenue grew 7% QoQ on higher school milk sales and the consolidation of Inside Scoop sales. Note that 2QFY24 GPM rebounded strongly by 8.6ppts to 26.3% – the highest level in 1.5 years – reflecting easing input costs and Inside Scoop’s higher GPM. This more than offset the spike in opex (+24% QoQ) to account for higher admin costs arising from the establishment of new subsidiaries such as Inside Scoop. As a result, 2QFY24 core net profit almost tripled to MYR15m.

• Outlook. We expect higher savings from easing input costs going forward to drive further GPM recovery and propel positive QoQ earnings momentum. Also, new product launches (Figure 2) should underpin relentless sales growth, on top of steady growth of chilled products and UHT market penetration. Beyond the near term, FFB aims to launch its consumer packaged goods (CPG) ice cream in early 2024, leveraging on the expertise of Inside Scoop and distribution network of newly acquired Sin Wah Ice Cream. The product range will cover both upmarket (under the Inside Scoop brand) and mass market (<MYR2 ice creams under Farm Fresh and Sin Wah brands). Meanwhile, capacity expansions are ongoing with the Bandar Enstek plant after the Taiping plant came onstream earlier this year.

• Risks: Higher-than-expected input costs, major delays in expansion plans.

Source: RHB Securities Research - 29 Nov 2023