KUALA LUMPUR (April 3): Farm Fresh Bhd (KL:FFB) is flagging cost pressures and disruption to supply of packaging from the conflict in the Middle East that could erode sales and margins.

The dairy company told analysts it is now grappling with higher prices of packaging, logistics, and electricity, which together make up about 10% of its total costs. Supply disruption to packaging may also affect sales of its main products, according to Maybank Investment Bank and CIMB Securities.

“A prolonged disruption could tighten packaging availability more broadly across the fast-moving consumer goods sector” and not just for Farm Fresh, CIMB Securities warned.

Apart from disrupting the flow of oil and gas, the war between US-backed Israel and Iran has impeded the supply chain of polyethylene, an input known as PET resin used to produce common plastic bags and household items.

For Farm Fresh, which manufactures everything from chocolate milk to ice cream, the resin is required for its core one-litre and two-litre bottled milk products that account for 12%-13% of its revenue.

Shares of Farm Fresh fell for the fourth straight day on Friday, down two sen or a little under 1% to RM2.34. The stock, however, has lost more than 10% since the outbreak of the Iran war last month.

Farm Fresh will also have to bear the surge in prices of unsubsidised diesel for its boilers and farm tractors while utility costs may also be rising in the coming months as higher gas and coal prices lift electricity tariffs, Maybank Investment said.

Further, feed costs may also be driven up alongside higher fertiliser prices, the research house noted. The full extent of the impact of Middle East tensions on Farm Fresh’s earnings remains “uncertain but could escalate the longer tensions are dragged on”, Maybank Investment cautioned.

Both CIMB Securities and Maybank Investment are cutting their earnings forecasts while maintaining their ‘buy’ calls on Farm Fresh, betting on relatively resilient demand for essential products.