Maybank IB believes that Farm Fresh is on track to post better QoQ 3QFY24 earnings on expectations for a step down in whole milk powder costs and resilient product demand. Plans to expand production into other dairy products (eg liquid growing-up milk, ice creams, butter) also opens up new earnings growth opportunities in the long-run.
Imminent group margin accretion
Whole milk powder (WMP) ASPs have corrected to c.USD3,300/MT from a peak of c.USD4,700/MT in Mar 2022 (-30%). With this, Farm Fresh is expected to benefit from lower WMP costs from 3QFY24 onwards, given that it has fully utilised its high cost WMP inventory in 1HFY24. WMP ASPs are also expected to trend range-bound in the near term. The group has bought forward its WMP requirement at a price range of between USD3,000/MT to USD3,300/MT for deliveries until Jun 2024.
High product demand driving expansion plans
To capture further sales momentum for the company’s existing liquid milk and dairy products, and growing demand for new product launches, additional lines for processing and portion packing will be installed at its Muadzam Shah, Larkin and Taiping facilities. FFB’s new manufacturing hub in Bandar Enstek is also targeted to complete construction by 4QCY24. With this, its total finished goods annual production capacity could increase by c.17% to 200.7m litres once its pre-planned capacity expansion plans are completed est. end-FY25.
Other dairy products to drive LT growth
Farm Fresh is preparing to launch its first consumer packaged ice cream product in Apr 2024. That said, until its Bandar Enstek manufacturing hub is operational, the roll-out of ice cream variants will be gradual due to capacity limitations at its facility in Ara Damansara. Separately, the company is in the process of installing a butter production line at its Taiping facility and aims to introduce butter products for sale sometime in 2HCY24
Reiterate BUY with unchanged TP of MYR1.65
