KUALA LUMPUR (April 29): Mercury Securities Sdn Bhd has recommended investors to “subscribe” to ACE Market-bound Farm Price Holdings Bhd at an initial public offering (IPO) price of 24 sen and a fair value (FV) of 29 sen based on 13x FY2024F earnings per share, translating to 21% upside to IPO price.
In a note on Monday, the research house said its target price earnings (PE) ratio of 13x is pegged to the average PE of FBM Small Cap Index, given no direct comparable listed peers.
Mercury said despite the weaker ringgit (more than 80% of its fresh vegetables are imported), Farm Price maintained healthy gross margins of 14-20% from FY20-23, thanks to inelastic demand and frequent pricing adjustments.
“The lower margins recorded in FY21-22 were mainly dragged by labour shortages and higher shipping costs during the Covid-19 pandemic.
“Since then, gross margins have rebounded considerably to 20% in FY23, underpinned by better operation efficiency and favourable supply conditions,” it said.
Mercury said with the expansion at its Senai centralised distribution centre, Farm Price will eventually add new cold room space and facilities to handle up to 40,000 pallets annually by 2026 (from about 30,000 pallets currently).
It said this expansion will be crucial to support Farm Price’s future growth, as its cold room capacity was fully utilised in 2023.
“Notwithstanding that, we believe the group has some room to maneuver in the near term (ie FY24-25) by implementing various storage management measures such as 1) Running extra processing shifts and facilitating additional delivery trips to free up inventory space; or 2) Renting on-site mobile refrigerated containers.
“Risk factors for Farm Price include (1) Labour shortages; (2) Fluctuation in fresh vegetable prices; and (3) Forex risks,” it said.
The research house said post-IPO, Farm Price’s balance sheet will be stronger, with its net gearing level turning net cash.
“Given the nature of its business, operating cashflow generation is expected to remain healthy, while capex spending will be funded by the IPO proceeds.
“As such, we forecast that Farm Price could comfortably adopt a 30-50% dividend payout in FY24-26F,” it said.