Sunday 04 Jun 2023
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KUALA LUMPUR (Nov 24): CGS-CIMB has raised its target price for Farm Fresh Bhd to RM1.65 while maintaining a "hold" call on the company, which posted a lower net profit of RM11.3 million in its second quarter ended Sept 30, 2022 (2QFY2023).

The local dairy company’s net profit for 2QFY2023 dropped 64.53% to RM11.3 million from RM31.53 million for the same quarter last year due to net forex loss, said the research house.

“Our TP is raised to RM1.65 (28 times calendar year 2024 [CY2024] forecast P/E, in line with target average P/E of domestic dairy-based beverage manufacturers), as we roll over our valuation year to end-CY2023,” said CGS-CIMB.

“In our view, current valuations have largely priced in FFB’s (Farm Fresh's) growth prospects (three-year core earnings per share of 10.5%) and its position as a strong proxy for the growing demand for fresh milk goods in the Asian region.”

The core net profit for the first half of financial year 2023 (1HFY2023) of RM28.1 million came in below the research house's expectations at 33% and Bloomberg consensus' FY2023 estimates at 31%.

“The earnings miss was due to weaker-than-expected margins from higher input costs and higher-than-expected marketing costs in 2QFY2023.”

Meanwhile, CGS-CIMB highlighted the higher revenue in 2QFY2023 rose by 12.6% due to higher sales volume and price hikes for chilled ready-to-drink products since Aug 22, 2022.

“On a cumulative basis, 1HFY2023 revenue rose 19% year-on-year while core net profit fell 53.8% year-on-year.”

According to CGS-CIMB analyst Walter Aw, the weaker 1HFY2023 profitability was due to higher input costs, surge in selling and distribution costs and tax payments.

“We expect FFB to post stronger half-on-half results in 2HFY2023, on the back of higher overall sales volume, especially with new product launches (growing-up milk in Oct 22 and UHT whole milk powder products in Nov 22),” said Aw.

Aw also expected Farm Fresh to benefit from price hikes that was implemented in mid-2QFY2023 and for them to be reflected in 2HFY2023.

“This is in addition to the recent weakening of whole milk powder prices (-12% since 1HFY2023),” said Aw, “We also gather that FFB is targeting to increase production capacity for its UHT milk products by 25-30% (+40 million-60 million litres annually) by 4QFY2023F, which should alleviate bottlenecks in production of UHT milk products (currently dedicated to products for the school milk programme, which have lower margins).”

The analyst lowered its FY2023-2025 forecasted earnings per share by 13.2%-15.4% with the earnings miss in 2QFY2023, due to higher marketing expenses and increased input costs.

At the time of writing, Farm Fresh’s share price fell two sen or 1.27% to RM1.55, while its market capitalisation was RM2.88 billion.

Edited ByIsabelle Francis
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