This article first appeared in The Edge Malaysia Weekly on March 7, 2022 - March 13, 2022

JOHOR-based dairy product specialist Farm Fresh Bhd — en route to a listing on the Main Market of Bursa Malaysia on March 22 — is looking to expand its operations in Asia-Pacific and strengthen its product portfolio, in a move to boost its profitability.

“Malaysia has a population of only about 30 million. It makes sense for us to look at expanding our export markets and overseas operations,” its co-founder and managing director Loi Tuan Ee tells The Edge in an exclusive interview.

Farm Fresh, which is already selling its dairy products in Malaysia, Australia, Singapore and Brunei, has set its sights on expanding its presence in Hong Kong, Indonesia and the Philippines.

“We want to be able to penetrate the Hong Kong market, which we believe is similar to the Singapore market. We also think Indonesia and the Philippines are interesting markets,” says Loi, 59, a farmer-turned-entrepreneur who grew up in a small town in Perak.

Farm Fresh, formerly known as Holstein Milk Co Sdn Bhd, reported an adjusted profit after tax (PAT) of RM69 million in the financial year ended March 31, 2021 (FY2021), on revenue of RM490.5 million.

The group generated PAT of RM39 million in the cumulative six months ended Sept 30, 2021 (1HFY2022), on revenue of RM257.2 million. For perspective, 85% of Farm Fresh’s revenue in FY2021 and 1HFY2022 was derived from the home market, followed by Australia at 10% to 11% and Singapore at nearly 4%.

“Singapore is obviously a low-hanging fruit, being located just across the Causeway. In fact, our products would reach Singapore faster than KL [from the factory in Johor]. This is our advantage and we want to strengthen our product presence in Singapore,” says Loi.

Farm Fresh operates five dairy farms in Malaysia and one in Australia, totalling 5,416 acres and with a total herd size of about 9,960 bulls and dairy cows, of which 3,748 are milking cows.

The group also owns and operates two processing facilities in Johor and Pahang, with the capacity to produce 137 million litres of finished goods annually, as well as a processing facility in Kyabram, Australia, with the capacity to produce 84 million litres of processed milk a year.

Loi acknowledges that fresh milk does not travel well and its shelf life is very short. Therefore, Farm Fresh needs to start with the chilled category, which is where its strength is, and plans to penetrate this segment in the Indonesian market.

“Realistically, we are unlikely to operate dairy farms in Indonesia. Our idea is to use our Australian processing plant as a feeder to supply all the ingredients needed to Jakarta or Manila, to produce yogurt and fresh milk. This is our strategy to expand our regional presence,” he says.

Loi favours expanding into Indonesia and the Philippines, as there are no fresh milk champions there, but Farm Fresh has to identify a strong partner first.

He attributes the success of Farm Fresh in Malaysia to sovereign wealth fund Khazanah Nasional Bhd, which owns a 30% stake in the group. “When we venture into other countries, we have to be mindful that we need to find an appropriate business partner. Product development-wise, we have a team that understands our products, business, trade and distribution,” he says.

Loi recalls that Khazanah’s investment in 2011 made a big difference for Farm Fresh, giving the group access to more land and facilities to expand its business.

“With Khazanah’s support, we also managed to convince the government that it is possible to make this dairy business viable in pursuit of the national food security goals,” he adds.

Loi holds a controlling 70% stake in Farm Fresh and Khazanah owns the rest. Upon listing and assuming the exercise of the employee share option scheme (ESOS), the shareholding of Loi and the sovereign wealth fund are estimated to be diluted to 43.65% and 11.57% respectively.

Farm Fresh had on Feb 28 announced that its initial public offering (IPO) price was set at RM1.35. The group will have a market capitalisation of RM2.5 billion upon listing, with an enlarged share capital of 1.857 billion shares.

This values the group at 69 times its FY2021’s profit of RM36.2 million and 36 times its adjusted PAT of RM69 million, after taking into consideration factors that include one-off tax liability expenses that are not part of its core earnings.

Farm Fresh will raise about RM1 billion through an offer for sale of up to 520.2 million of its shares and a public issue of 223 million new shares. This makes it Malaysia’s largest IPO since June 2021.

Farm Fresh will use the fresh capital of RM301 million, mainly to set up a new manufacturing hub, dairy farm and integrated processing facility in Malaysia, as well as for the expansion of a production facility in Australia and other regional expansion outside Malaysia.

Notably, Farm Fresh’s IPO has secured support from a record number of 30 cornerstone investors, the most seen in a Malaysian IPO. Collectively, these cornerstone investors will take up about 80% of the institutional offering tranche under the IPO.

“It’s been an amazing journey for Farm Fresh. When we first started with 60 Holstein Jersey cows at our little farm in Johor, nobody would have expected us to reach this far,” Loi says.

He notes that after quitting his previous job, he started raising dairy cows at a farm. It was then that he realised that the local dairy segment is dominated by milk powder.

“We saw an opportunity to differentiate ourselves. About 10 years ago, if you had gone to the supermarket, there was little visibility of Farm Fresh milk. It is a different story today when you observe the milk shelves. The taste of our products is very distinctive,” he says, adding that most of its sales come from repeat customers.

“Our intention has always been to build a sustainable and resilient business. The one thing that really stands out for Farm Fresh is that we truly believe in the fresh milk category. We do not add preservatives and colouring in our products. Brand affinity is extremely important. We have to make sure that we keep these values close to our hearts,” he says.

Farm Fresh intends to diversify its product portfolio by rolling out fortified liquid fresh milk products soon. The group is not in the infant formula market, as the amount of sugar in these products can be “unbelievably high”, according to Loi.

“We believe that fortification is good. We intend to fortify our liquid fresh milk. We want to go into this space. We want to offer mothers a choice of dairy products that are free of sugar, hidden sugar and vegetable fat. If you start your children with the right dairy product, their growth path will be better,” he says.

Noting that it is still too early to provide an estimate of contribution, Loi says fortified milk will be the company’s next growth area and focus in the coming years.

“We believe that, with enough communication and education, people will switch to fortified milk. Again, it is nothing (involving) high technology. It’s just fortification. We hope that after mothers stops breastfeeding, they won’t go for baby formula but go for our ready-to-drink fortified fresh milk instead,” he reiterates.

Farm Fresh is also mulling going into the powdered milk market in the future by capitalising on the strength of its brand. “We do not rule out this possibility, but that’s not our immediate focus. We don’t believe in added sugar, we don’t believe in vegetable oil. If we were to go into the powdered milk space, we will be using a whole milk powder base for fortification,” says Loi.

In an IPO note dated March 2, Mercury Securities analyst Ronnie Tan gave Farm Fresh a “subscribe” recommendation, with a target price of RM1.53, based on a peers’ average price-earnings ratio (PER) of 28.8 times and FY2023 earnings per share of 5.3 sen.

“We like Farm Fresh for its strong market presence in Malaysia’s dairy industry as well as its local and regional expansion plans. The company has a dividend policy of 25%. The target price represents a potential return of 13.3% over the IPO price,” he wrote.

Tan warned, however, that the risk factors include fluctuation of feed prices, labour shortage and unexpected pandemics of infectious disease.

Commenting on the challenging business environment, Loi admits that the temporary headwinds that Farm Fresh faces are escalated logistics costs and rising commodity prices.

“Am I concerned about these issues? Yes, but not to the extent that these factors will drag us down. So, our gross profit margin might be compressed but, to us, it’s just a cycle. Hopefully, by next year, things will get better,” he says.

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