KUALA LUMPUR (Sept 12): Farm Fresh Bhd's earnings bottomed in the fourth quarter ended March 31, 2023 (4QFY2023), but are expected to improve sequentially, after the company raised its selling prices in July, while costs have declined, according to CGS-CIMB.
The research outfit revealed at a briefing during the CGS-CIMB consumer conference 2023 on Sept 6 that Farm Fresh group chief financial officer Mohd Khairul Mat Hassan said farmgate prices of raw milk in Australia slipped 4%, while whole milk prices fell 24% year-on-year, in August.
"It will take a few quarters before the full impact of the above will be seen in reported profits. Most importantly, the management expects [the company] to revert to its previous earnings trajectory, which we interpret as heading back above RM100 million per annum in net profit, albeit post FY2024," CGS-CIMB said in a note on Tuesday.
"There will be a lag in these costs filtering through inventories, but the downward trajectory is clear. The management has also been hedging Farm Fresh’s US dollar exposure, with US dollar-ringgit rates of 4.53-4.55 locked in until end-2023.
"We estimate Farm Fresh's gross margins to rebound in the coming quarters, helped by lower costs as well as the average 5% price increase effective from July 1, with a 26% gross margin for FY2024, versus 1QFY2024’s 17.7%."
CGS-CIMB kept its "hold" recommendation, with an unchanged target price (TP) of RM1.37, based on the Gordon growth model, which assumes a recurring return on equity (ROE) of 16%, based on FY2026, an 8.5% cost of equity growth and a healthy 5% long-term growth rate, resulting in a target FY2025 price-to-book value multiple of 3.1 times.
"At RM1.37, Farm Fresh would be trading at 22 times calendar year 2024 price-earnings (P/E), which is comparable to -0.5 standard deviation of peer Fraser & Neaves Holdings Bhd’s ('add'; TP: RM28.30) 15-year mean P/E. A return to recurring ROEs of 20% (similar to FY2022’s) would take our fair valuation to RM1.87, while only delivering a 12.5% ROE would result in a fair valuation of 93 sen.
"Farm Fresh’s earnings trajectory in the coming quarters will be key to setting expectations for medium-term earnings and ROEs, and thus its share price trajectory. Failure to deliver on investor expectations of a margin recovery is a key downside risk, in our view, while surpassing those expectations will drive a rerating, hence an upside risk."
At the time of writing on Tuesday, Farm Fresh was unchanged at RM1.24 a share, with a market capitalisation of RM2.32 billion.