This article first appeared in Capital, The Edge Malaysia Weekly on July 1, 2024 - July 7, 2024
SHARES of Malayan Flour Mills Bhd or MFM (KL:MFLOUR) have risen by 35% year to date as its financials improved while investor forum chatter has revolved around the possibility of a corporate exercise.
When asked if the flour miller may have found a strategic partner for its flour business, MFM tells The Edge it doesn’t need one.
In 2021, MFM, which has two main business divisions — flour and grain trading, and poultry integration — sold a 49% stake in its integrated poultry business held via Dindings Supreme Sdn Bhd to New York-listed Tyson Foods for RM420 million in cash. Under the strategic partnership, Tyson was granted a call option to buy another 11% in Dindings Supreme within five years of the shareholders’ agreement executed upon completion of the disposal. Additionally, Tyson has the option to acquire all the Dindings Supreme shares it does not own in the event there is a change of control of more than 50% of shares in MFM.
As to whether Tyson could be exercising its call option to buy an 11% stake in Dindings Supreme, MFM says this is not the case. “No, not true. Tyson Foods can only exercise the option after the fifth anniversary,” says MFM.
Notwithstanding talk of a corporate exercise, it is worth noting that MFM has benefited from lower prices of wheat.
For its first quarter ended March 31, 2024 (1QFY2024), net profit more than tripled to RM37.9 million from RM10.44 million a year ago, although revenue fell 9.1% to RM751.602 million.
Its cost of goods sold declined 14.15%, resulting in gross profit (GP) expansion to 10.63% compared with 5.35% a year ago. For comparison, MFM registered GP margins of 7.5% in FY2023 and 8.3% in FY2022.
Apart from that, interest expense fell by nearly 30% over the period under review due to lower borrowings.
According to notes to its financial statements for 1QFY2024, the improvement in the flour and grain trading segment’s profitability was attributable to lower wheat consumption costs that were however partially offset by the lower selling price as well as lower realised and unrealised gains on commodity, derivatives and foreign exchange.
MFM’s joint venture (JV) in Indonesia — where it has a 30% stake in PT Bungasari Flour Mills — also turned the corner, resulting in a share of profit of RM7.6 million for the group compared to a share of loss of RM8.6 million in 1QFY2023. The improvement was again due to “a greater decrease in wheat consumption costs”, according to the notes to the accounts.
Wheat costs, along with the prices of a number of commodities, have eased significantly from the highs of March 2022 when Russia invaded Ukraine, a major grain producer. In March this year, wheat prices hit a three-year low of US$5.28 per bushel.
Whether prices stay low on expectations of a strong harvest from Russia remains to be seen due to weather factors.
The active contract for wheat was trading at US$5.6575 per bushel at the time of writing while the median forecast on Bloomberg for the fourth quarter of 2024 stood at US$6.08.
However, MFM’s JV with Tyson resulted in a share of loss in 1QFY2024 of RM1.2 million compared to a share of profit of RM15.3 million a year ago due to lower sales volume, lower selling price and discontinuation of the chicken subsidy. These were offset by lower input cost and higher fair value gain on biological assets recognised in 1QFY2024.
MFM in a press statement on May 17 on its 1QFY2024 results noted that the poultry division had been affected by “the current boycott of its quick service restaurant clientele of western brand names”.
However, it remained optimistic on the outlook for the segment saying Malaysians still have a “strong affinity for chicken meat” and that it would identify new markets locally and abroad while working with Tyson to improve its upstream farming and downstream activities to meet future demand.
Meanwhile, MFM tells The Edge the outlook remains positive for the group and it expects to stay in the black for FY2024. “As for the poultry business, with the expected recovery in the demand and the synergistic partnership with Tyson, the group is optimistic of its segment’s outlook for 2024 and beyond.”
Despite challenges in the poultry business, MFM said in its May 17 statement that it intends to spend RM200 million in FY2024 to upgrade and expand its breeder farms, and further automate its poultry processing plant in Sitiawan, Perak.
Apart from that, it will invest RM100 million in FY2024 to install a new milling line of 600 tonne per day in Lumut, and build more flour silos and blending facilities in one of its Vietnam plants.
The total capital expenditure of RM300 million will be funded by internally generated funds and bank borrowings. MFM’s net gearing stood at 0.33 times as at March 31,2024.
Since reaching an intraday high of 92.5 sen on June 12 this year, MFM’s shares have slipped to 81.5 sen but rebounded to close at 85 sen last Wednesday, valuing the group at RM1.053 billion.
At 85 sen a share, MFM was trading at 10.76 times FY2024 earnings.
The only brokerage firm covering the flour miller is AmInvestment Bank, which has a “buy” call with a target price of 87 sen.
MFM’s largest shareholder is executive deputy chairman and managing director Teh Wee Chye, who has direct and indirect stakes of 16.07% and 7.04% respectively in the flour miller.
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