An animal health solutions and nutrition company, Rhona Ma is venturing into the dairy business, according to UOB KayHian’s research coverage (dated 16 March 2022) on this counter.
Rhone Ma’s downstream acquisition into dairy farming is gathering pace. In 2020, Rhone Ma went downstream into the livestock industry through its RM7.8m acquisition of the Lazuli group of companies. Dairy farming is among its principal activities. It has grown its Holstein cow herd into 300 heads as of end-21 from 40 cows in 2019. While Holstein cows have high milk yield, it is not typically bred in Malaysia due to the tropical climate but these hurdles were overcome by Rhone Ma’s excellent farm management. In addition, Rhone Ma’s Holstein cows produce the highly-prized A2 milk, which is said to aid with milk intolerance and commands a 20-30% premium (raw milk form). Aside from its cow herd, Rhone Ma looks to build its own milk processing plant (due for completion by end-22) with 15,000 litres of milk processed a day.
Further dairy boost from JV, that ultimately feeds into own brand milk product. A JV was formed with Kulim Berhad (Kulim) to manage a potential dairy project. The research house has gathered that the project could include the managing of 1,000-2,000 cows. While Rhone Ma owns a 35% stake in the JV. Alongside the JV and Rhone Ma’s existing dairy farming operations and milk processing capabilities, these are envisioned to fit into Rhone Ma’s aim to launch its own dairy milk brand for end consumers.
The management of Rhone Ma envisions grand plan for the future that its upcoming dairy farming pillar could contribute 50% of Rhone Ma’s revenue over the medium term. Farm Fresh’s three-year net profit margin average (2019-21) is 12.0%. It implies Rhone Ma’s dairy farming could be potentially margin accretive as well. This could provide the impetus for a multi-year growth for the company ahead.
The research house finds the valuations is traded at discount now. At its current historical valuations, Rhone Ma is trading close to its five-year PE mean of 12.8x. Meanwhile, its related peers within the animal health/feed, poultry and F&B companies with dairy products industries are trading at 15.4x, 19.3x and 33.1x respectively. UOBKayHian also opined, given that Rhone Ma’s dairy business could be significant over the medium term (doubling existing revenue base and with better margins, exponentially grow its earnings), Rhone Ma’s valuations could re-rate closer to its peers.
Rhone Ma plans to undertake a private placement of 10% of its issued shares to raise between RM13.5m and RM18.8m to fund the setting up of a milk processing plant by 3Q25.
Through the government’s National Dairy Industry Development Strategic Plan, it aims to achieve 100% self-sufficiency for fresh milk by 2025. Local milk production in 2020 was at 43.3m litres vs consumption of close to 70m litres of milk. This should lend structural growth for Rhone Ma’s dairy farming project. Aside from that, due to the shortfall in local milk production, Rhone Ma is currently able to sell its milk for RM3.50/litre, which is above its input cost. Hence, the dairy farming risk is reasonably managed.
Although, Rhone Ma’s 300 strong cow herd is considerably smaller than Farm Fresh’s existing cow herd of 8,600 cows. However, that enables Rhone Ma to breed high milk yielding Holstein cows that yields the aforementioned highly prized A2 milk. Given Rhone Ma’s higher milk yield, it could perhaps command operating margins similar to or better than that by Farm Fresh (2019-21) of 20.6% as Rhone Ma scales up. This could be margin accretive to Rhone Ma’s existing margins of 10.0%.
Key risks associated with the nature of the business are contamination of products and lapsed exclusive distributorship or rights of third-party products.
