KUALA LUMPUR (June 21): Farm Fresh Bhd is pursuing a multi-pronged expansion plan to capitalise on rising fresh milk consumption in the ASEAN region, backed by its strong research and development (R&D) culture and growing product portfolio, stockbrokers said.
With most local milk producers fully dependent on third-party milk supply, Farm Fresh's integrated “farm-to-glass” model with in-house facilities across its entire supply chain gives it a competitive advantage over its peers, according to RHB Investment Bank Bhd and CGS-CIMB Research, which initiated coverage of the stock on Tuesday (June 21).
RHB has a "buy" call on Farm Fresh with a target price (TP) of RM1.88. The research firm believes the counter deserves a valuation premium given the scarcity of quality consumer staple stocks in the local market. “Risks to our recommendation include a sharp rise in commodity prices and major delays in expansion plans,” it said in a note.
According to RHB, Farm Fresh is expected to see sustained growth — given its efforts to further increase market share and robust industry growth — supported by rising demand for fresh and pragmatic products, backed by increasing health awareness and consumer affluence.
The group, which made its debut on the Bursa Main Market in March this year, has earmarked 80% of its IPO proceeds (RM240 million) for expansion plans that will see it increase its production capacity by 23% in the financial year ending March 31, 2023 (FY23) and 52% in FY24.
This ambitious expansion will address the company's growth strategies, according to RHB. These include strengthening its presence in the ultra-high temperature (UHT)/ambient milk segment, entering new export markets in Indonesia and the Philippines, and launching new products (including plant-based yogurt and dairy-free packaged foods and beverages).
“Taking into account all this, we forecast a three-year net profit compound annual growth rate (CAGR) of 21%,” said RHB.
Meanwhile, CGS-CIMB has an "add" rating with a TP of RM1.83, with the risk of an increase in input costs and weaker sales volume.
“Farm Fresh currently has a total of six dairy farms (we estimate supply of up to 32.7% of its raw milk requirements in FY23F) and three processing centres in Australia and Malaysia, backed by its multi-channel distribution network that includes its unique in-house home dealer programme (stockist/dealers: 30% of FY22 sales),” said CGS-CIMB.
However, CGS-CIMB said it is not overly concerned about rising input costs as it believes Farm Fresh’s commanding share of the local market and superior product quality allow the group to raise selling prices to pass on any additional costs.
“Overall, we project Farm Fresh posting a robust three-year CAGR core net profit growth of 22.6% for FY22-25F,” it said.
Farm Fresh opened at RM1.52 on Tuesday and was three sen or 1.97% up at time of writing, valuing the group at RM2.88 billion. It is 9.88% lower year-to-date from RM1.72.
According to Bloomberg data, there are four "buy" calls on the stock, as well as two "outperforms", one "hold" and one "add", with target prices ranging from RM1.78 to RM2.10.
On earnings, RHB has projected a rise in Farm Fresh's net profit to RM94 million in FY23, RM118 million in FY24 and RM147 million in FY25. Its revenue forecasts stood at RM623 million, RM731 million and RM884 million for FY23 to FY25 respectively.
CGS-CIMB has forecasted a net profit of RM103.3 million on revenue of RM644.7 million in FY23, followed by RM127.1 million net profit on revenue of RM760.5 million in FY24 and RM157.9 million net profit on revenue of RM926.1 million in FY25.
For FY22, Farm Fresh registered a RM79.9 million net profit, up from RM36.23 million in FY21, on higher gross profit margin driven by the increase in sales of its chilled ready-to-drink (RTD) milk products and ambient RTD products.
FY22 revenue increased to RM501.92 million from RM490.5 million on higher recruitment of new customers, higher sales of RTD milk products and launching of new products.