Farm Fresh chief operating officer Azmi Zainal (pink shirt) taking the MBSJ delegation on a tour of the dairy farm.
PETALING JAYA: The higher-than-expected milk farm gate prices for the new season is a negative surprise for Farm Fresh Bhd
, which points to a tougher recovery path ahead, according to RHB Research.
With the setback, the research house has turned more conservative with its valuation taking into account the group’s weaknesses in earnings visibility and consistency.“There are minimal earnings downside risks moving forward and the heavy selldown about 29% year-to-date may have largely priced in the weakness,” RHB Research said in a note to clients yesterday.
As opposed to an expected 14% year-on-year (y-o-y) drop in farm gate milk prices, the prices for new season July 2023-June 2024 inched down by a mere 1% y-o-y or 4% versus the prices Farm Fresh paid in 1H23.“This prompted us to cut our financial year 2023 (FY23) to FY25 earnings by 11%-13%, as our previous margin assumption is rendered too aggressive,” added the research house.
According to Farm Fresh management, there was a surge in demand for milk domestically in Australia since the second half of June, resulting in the higher-than-expected prices.
Notwithstanding the disappointment, RHB Research noted its new forecasts indicate FY24 growth of 42% as margins are still expected to normalise from the exceptionally low 4Q23 base.
“This will be driven by rising sales volumes of UHT products on the back of higher contributions from Yarra By Farm Fresh products and the School Milk Programme.
“Margins will also expand due to the lower price estimated at about 13% lower y-o-y of its key raw material, whole milk powder (WMP),” it added.
In addition, the 5% price hike for its chilled products effective mid-July is estimated to generate additional sales of RM10mil in FY24.
RHB Research noted the hotel, restaurant and cafe segment’s positive traction should also support earnings growth.
The research house also expects Farm Fresh 1H24 earnings should remain under pressure, considering the heightened input costs before a recovery in 2H24.
“The consolidation of The Inside Scoop’s account will be earnings accretive, while the commissioning of consumer packaged goods ice cream production lines and the Philippines operations without major hiccups will lend further support to the pick-up in 2H24,” said RHB Research.
The research firm, which has downgraded the stock to a “neutral” from a buy previously, has a new target price of RM1.23 from RM1.72 earlier.
“We raise our risk premium assumption to reflect the volatile earnings trend following our latest earnings cut (fourth cut since our initiation in June 2022). This is warranted as we see lower earnings visibility now with the elevated farm gate prices and higher exposure to the more volatile WMP commodity,” added RHB Research.
