• Maintain BUY and MYR2.11 TP, 17% upside with c.1% FY25F (Mar) yield. Farm Fresh’s 1HFY25 results met expectations on robust sales growth and margin expansion. We expect FFB to continue leveraging on its established brand equity to penetrate more market segments in the dairy industry, thereby fuelling its relentless topline growth. Our positive stance is premised on the visible and long runway for growth, more consistent earnings delivery, and management’s ambitious vision, which should warrant a valuation premium.

• 1HFY25 results in line. Core net profit of MYR53m (+169% YoY) accounted for 47-48% of our and consensus full-year forecasts. Post results, we make no changes to our earnings forecasts and DCF-derived TP of MYR2.11 (inclusive of a 6% ESG premium), which implies 30x 2025F P/E, or +1SD from its 5-year mean.

• Results review. YoY, 1HFY25 revenue surged 28% to MYR491m, thanks to the solid sales growth of the hotel, restaurant and catering (HORECA) markets and commercial ultra-high temperature (UHT) products, further aided by new product launches including Farm Fresh Choco Malt and consumer packaged goods (CPG) ice cream. 1HFY25 GPM expanded by 9.8ppts to 31.9%, in line with the lower input costs and contributions from the new ice cream business subsidiaries which command higher margins. This more than offset the 50% jump in opex to support business expansion and propelled 1HFY25 PBT to almost triple YoY to MYR58m. QoQ, 2QFY25 revenue and core net profit rose 3% and 7% to reflect the relentless sales growth momentum and more favourable input costs.

• Outlook. We expect GPM to remain elevated in the upcoming quarters, in light of the progressive liquidation of lower-cost (by 11%) farmgate raw milk whilst favourable whole milk powder prices have been locked in until May 2025. In addition, the rising contribution from ice cream, chocolate malt, and growing-up milk products should lend support to GPM and drive sales growth ahead. Apart from expanding the portfolio of ice cream and chocolate malt products, other key new product launches in the pipeline include butter to further strengthen the HORECA offerings, and cultured milk to build on the brand equity in the children’s products market. Meanwhile, the group has successfully commenced operations at its Philippines production unit according to plan, after establishing a presence and having brand-built there via imports earlier.

• Downside risks to our recommendation include a sharp rise in input costs, and major delays in expansion plans.

Source: RHB Securities Research - 29 Nov 2024