This article first appeared in The Edge Malaysia Weekly on May 22, 2023 - May 28, 2023

IN March last year, the initial public offering (IPO) of Johor-based integrated dairy producer Farm Fresh Bhd, which raised RM1 billion, including fresh capital of RM301 million, was seen as a breath of fresh air for the local bourse.

Previously, investors who wanted exposure to the consumer dairy sector could only choose from the multinational corporations, namely Nestlé (M) Bhd, Fraser & Neave Holdings Bhd (F&N) and Dutch Lady Milk Industries Bhd.

However, while the highly anticipated listing of Farm Fresh injected some excitement into the local investing fraternity, its earnings and share price have yet to perform up to expectations.

Over the past 12 months, Farm Fresh’s share price has declined 6%. It closed at RM1.57 last Wednesday — still 16% higher than its IPO price of RM1.35 — giving it a market capitalisation of RM2.9 billion.

In comparison, the share price of F&N, which privatised sugar confectionery producer Cocoaland Holdings Bhd in November last year, has advanced 31%. It settled at RM26.80 last Wednesday, bringing its market capitalisation to RM9.8 billion.

F&N is controlled by Singapore-listed Fraser & Neave Ltd, which is ultimately owned by Chinese-Thai business magnate Tan Sri Charoen Sirivadhanabhakdi via his beer and liquor giant Thai Beverage pcl.

Meanwhile, the share price of Swiss-owned Nestlé gained 0.5%, whereas that of Dutch-owned Dutch Lady dropped 22%.

A quick check on Bloomberg shows that most research analysts favour F&N and Farm Fresh over Nestlé and Dutch Lady.

Farm Fresh has seven “buy” calls and three “hold” recommendations, while F&N has five “buy” and two “hold” recommendations. Neither Nestlé nor Dutch Lady has any “buy” ratings at the moment. In fact, five analysts advise investors to sell Nestlé.

In terms of potential upside to analysts’ consensus target prices, F&N could go up by 17%, slightly higher than Farm Fresh’s 14%.

Farm Fresh co-founding managing director Loi Tuan Ee says his ultimate dream is to mould the company into a mini-Nestlé of sorts.

“Don’t get me wrong, I wouldn’t go as far as to say that we want to build an F&B [food and beverage] conglomerate. My point is, we don’t want to restrict ourselves to only making dairy products. We don’t want to miss out on other opportunities in the non-dairy markets, simply because Farm Fresh is, by definition, a dairy company,” he tells The Edge.

For example, says Loi, Farm Fresh might produce cereal products in the future. The company might even set up its own cereal division and healthy snacking division, as well as introduce its own bottled tea series.

“Again, I am not saying we will produce cereal or we must produce cereal, but it’s certainly something that we are not ruling out. These are not our immediate priority. But for sure, Farm Fresh will continue to evolve carefully in the next 10 years,” he stresses.

Unlike some MNCs, Farm Fresh is a nimble organisation, says Loi, who is the company’s single largest shareholder with an equity interest of 43.25%.

For instance, he adds, when a cooperative-owned dairy company comes to Asia, its objective is very simple — to sell the milk produced by its farmers from Europe. 

“But Farm Fresh doesn’t have such legacy issues. We could divert and we could evolve when the opportunities arise. After Inside Scoop, we will continue to look out for more mergers and acquisitions opportunities, but we will be very selective. As it stands, ice-cream and growing-up milk will keep us very busy in the next few years,” Loi explains.

He also points out that investors should view Farm Fresh as a long-term investment.

“We want them to see us as a company with the right culture. We truly think that over the next five to 10 years, we will be a wonderful company. We had told the market that we wouldn’t do so well in FY2023 [financial year ended March 31, 2023] due to various challenges.

“But things are improving now with commodity prices starting to normalise. This means our profit margin will improve, and with bigger volume, our company will become very profitable again,” Loi says confidently.

He urges investors to look at how Farm Fresh has grown over the past decade, pointing out that dairy is a resilient business and not a cyclical industry.

“To me, it is extremely important to uphold our company values. Our customers support us, they trust our brands and products, making us the largest home-grown dairy producer in Malaysia. We have to maintain that relationship with our customers. If we continue to do that part right, this will be an evergreen business,” Loi remarks.

He admits, however, that it is not easy to hold on to these values when most investors are just looking at the financials.

“We face pressure from the investors and have to manage their disappointment. We need to explain to them that Farm Fresh is still a solid company. We are still growing and we are still fairly profitable.

“Of course, we are not making as much money as we did, but the commodity prices will eventually have to come down, so we are not overly concerned. As for our competitors, that is up to the investors to judge. All I want to say is, investors should look beyond the financial figures and not neglect a company’s core values,” says Loi.

He adds that Farm Fresh is prepared to take a beating in a challenging business environment.

“Of course, any business has to be profitable. If you’re not profitable, then you are finished. But what I’m trying to say is that we are willing to sacrifice our profit margin during certain seasons, but we will not sacrifice our product quality and integrity,” says Loi.

He highlights that although the shelf life of Farm Fresh’s chilled dairy products is short, the company refuses to add preservatives to its products to extend their shelf life.

“Everybody wants to produce a yogurt that can last three to four months. But how? By putting in preservatives. But we don’t. Our yogurt can only last 30 to 45 days. We just have to learn from that, even though it is painful.

“We hope that we can do well by doing good, this has been our motto. If you do things differently under cost pressure, your customers will soon realise that you are no longer the same. If you take a short-term view, you are going to make a lot of bad decisions that will haunt you in the years to come,” Loi reiterates. 

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