TA Research expects the renewed PSS contract to contribute at least RM66mil to Farm Fresh’s top line for 2024 financial year.
PETALING JAYA: Farm Fresh Bhd
’s operating environment is normalising, with its margins improving on the back of easing raw material costs, according to TA Research.
The supply chain disruption faced by the integrated dairy player is coming to an end, the research house said pointing out that a “turnaround is on its way”.
It further highlighted that energy and logistic costs have softened post-pandemic.
The cost of whole milk powder, which is a key input for Farm Fresh’s production, has also eased.
“We came away from a recent engagement with Farm Fresh feeling rest assured of its improving outlook,” it said in a note.
TA Research has a “buy” call on Farm Fresh, with a target price of RM1.70 per share.
“Despite the setback in Australia’s dairy production, which led to disappointment in the decline of raw fresh milk cost, we gather that the company’s cost structure will still see a continuous improvement from the second quarter of financial year 2024 backed by significantly low whole milk powder prices.
“In addition, the milk cost holds a weightage of about 50% in the breakdown of the cost of goods sold and the ratio of raw fresh milk to whole milk powder is approximately 55:45.
“Hence, we believe that a stabilised raw whole milk powder cost will lead to a recovery in the company’s gross profit margin to pre-Covid-19 levels of about 27%, coupled with 5% increase in average selling prices for chilled fresh milk and certain ultra high temperature (UHT) products in Malaysia effective mid-July 2023,” it said.
On the school milk programme (PSS), TA Research said Farm fresh has a contract renewal in June 2023, with higher profitability against the backdrop of softened key raw input cost.
Previously, for the 2022 to 2023 contract period, Farm Fresh was one of the three dairy companies under PSS to supply 75 million UHT dairy drinks.
TA Research expects the renewed PSS contract, to be delivered from July 2023 to June 2024, to contribute at least RM66mil to the Farm Fresh’s top line in the financial year of 2024 (FY24).
This is assuming the delivery size remains similar to the previous contract period.
Meanwhile, the acquisition of Inside Scoop is also projected to contribute positively to the Farm Fresh’s earnings from June 2023.
The existing premium scoop ice cream business is expected to grow by 15% per annum with their outlet expansion plans, according to the research house.
Looking ahead, TA Research has toned down its earnings forecasts for FY24 marginally by 1%.
This was done to reflect the slower-than-expected recovery in gross profit margin due to tepid decline in raw fresh milk cost.
“However, we raise FY25 and FY26 earnings projections by 23.8% and 53.3%, respectively, underpinned by the contribution from new filling machine, the earnings of new acquired business entity Inside Scoop and the higher profit margin from the new PSS contract,” it said.
