Review

• Farm Fresh Bhd (FFB) 1HFY25 core net profit of RM53.6mn came in within ours and consensus' expectations, representing 48% of the forecast.

• The group has declared a first interim dividend of 1.0sen/share for FY25.

• 1HFY25 turnover increased by 27.9% YoY to RM490.9mn, driven by stronger sales growth in Malaysia (+32.6% YoY to RM427.3mn) and Australia (+3.5% YoY to RM63.6mn). The strong performance in Malaysia was primarily driven by positive sales contributions from newly launched products, including Farm Fresh Grow, Choco Malt, and Cream Hauz, the consumer-packaged goods (CPG) ice cream. Additionally, sales from commercial UHT milk and the HORECA channel further boosted top-line growth. Meanwhile, the group also benefitted from higher external sales contributions from Goulburn Valley Creamery Pty Ltd.

• Driven by higher turnover, FFB's core earnings for 1HFY25 surged more than tripled YoY to RM53.6mn. The strong performance was further supported by lower input costs and improved profit margins, particularly in its Australian operations.

• Meanwhile, 2QFY25 revenue increased by 25.6% YoY to RM249.2mn, driven by a full-quarter contribution of RM25.1mn from Sin Wah and Inside Scoop (compared to RM3.8mn in 2QFY24). Revenue growth was also fuelled by higher demand from HORECA customers and commercial UHT products, resulting in a 17% YoY increase in total sales volume to 31.0mn litres (2QFY24: 26.6mn litres).

• In line with robust topline growth and lower milk ingredient costs, the GP margin expanded by 7.3%-pts YoY to 33.6% in 2QFY25. As a result, quarterly core earnings more than doubled YoY to RM28.1mn.

Impact

• No changes to our FY25-27F earnings projections.

Briefing Highlights

• Recently, whole milk powder prices surged above USD3,500/tonne, nearly reaching USD4,000/tonne. In response to these significant price increases, the group strategically entered into long-term delivery contracts at more favourable rates. As a result, FFB secured physical deliveries at prices ranging from USD 3,200 to USD3,250/tonne, ensuring cost stability through May 2025.

• The new product, Farm Fresh Choco Malt, launched in July 2024, has received a positive reception and has contributed meaningfully to the group’s topline over the past few months. FFB is in talks with 99 Speedmart to introduce the product, with plans for availability by next month or early January 2025. With the chocolate malt beverage market valued at RM1.0bn, the group aims to capture a 10% market share, which would translate to RM100mn in revenue moving forward.

• Management indicated that approximately 35% of the group’s employees are impacted by the revision in minimum wages. FFB estimates an additional annual staff cost of RM2.3mn, with RM2.2mn attributed to FFB employees and RM0.12mn to Sin Wah staff. This increase accounts for 0.3% of the group’s total cost of sales in FY25.

Outlook

• Moving forward, we believe FFB will continue to grow, fuelled by robust demand amid low input costs.

• FFB’s Australia operations achieved breakeven, recording a net profit of RM0.6mn in 2QFY25. We anticipate that growing demand, coupled with an approximately 11% YoY decline in farmgate milk prices to AUD8.75/kg in July 2024 (compared to AUD9.74/kg in July 2023), will continue to support its growth in FY25.

Valuation

• We maintain our target price at RM1.97/share, based on a 25x CY25 EPS. Due to the recent increase in the share price, we have downgraded the stock from Buy to HOLD.

Source: TA Research - 29 Nov 2024