MARC Ratings has affirmed its AA-IS rating on Farm Fresh Berhad’s Islamic Medium-Term Notes (IMTN) Programme of RM1.0 billion under the Shariah principle of Wakalah Bi Al-Istithmar.
The rating outlook is stable. The outstanding under the rated programme stood at RM300.0 million as at end-April 2024.
The rating affirmation is driven by Farm Fresh’s strengths as a vertically integrated dairy producer and key player in the domestic dairy industry with a strong market position in the chilled milk segment.
The rating is also underpinned by the group’s strategy of strengthening its upstream operations that would enhance milk supplies and downstream product lines, further increasing its brand presence and earnings diversification.
These rating factors are mainly counterbalanced by execution risk from recent expansions and margin pressures from raw material price fluctuations, MARC said today.
Farm Fresh expanded its upstream operations by adding an 828-acre dairy farm in Taiping, bringing its total farmland to 5,367 acres and increasing its herd size to 10,364 dairy cattle as at end-September 2023 (end-March 2020: 4,065 acres; 7,384 dairy cattle).
MARC Ratings also noted that Farm Fresh has begun full-scale dairy farm operations in Taiping, its second-largest dairy farm in Malaysia; this dairy farm serves northern Peninsular Malaysia, freeing up some capacity at its Larkin facility to focus on export markets. It has about 50% market share in the chilled ready-to-drink (RTD) segment.
Its acquisition of The Inside Scoop Sdn Bhd (Inside Scoop) in May 2023 and Sin Wah Ice Cream Sdn Bhd (Sin Wah) in October 2023, would strengthen its overall market position in downstream dairy products.
Inside Scoop has a growing presence in urban areas with 40 outlets, while Sin Wah, with a focus on popsicles, has a well-established logistics and distribution network in the country.
The higher margin from its ice cream retailers would provide some offset to the weaker margins in upstream operations, characterised by price fluctuations of raw materials, including feedstock.
Notwithstanding these strengths, the rating agency is mindful of the execution risk associated with the recent expansions and acquisitions, given the potential shifts in consumer preferences.
To mitigate this risk and enable a smooth transition, the group has maintained the role of Inside Scoop’s existing founders to lead the ice cream division for the next two years.
MARC Ratings understands that Farm Fresh’s consumer packaged goods ice cream manufacturing operations will commence in Taiping by end-June 2024, and subsequently be centralised in Bandar Enstek, Seremban; Sin Wah’s operations will also be moved to Bandar Enstek.
Farm Fresh’s milk processing facility in the Philippines will begin operations by end-May 2024. This facility will produce RTD products utilising raw milk from its Australian facility; it will also market UHT products imported from Malaysia.
MARC remains positive the expansions undertaken by Farm Fresh which have been mainly funded by initial public offering (IPO) proceeds, instead of relying on bank borrowings.
The remaining IPO proceeds of RM137.5 million as at the end of the first nine months of financial year ended March 31, 2024 (9MFY2024), provide headroom to finance its expansions.
The increase in borrowings to RM418.7 million was largely incurred for capex at its Taiping plant, with the gross debt-to-equity ratio standing at 0.63x (end-FY2023: RM336.3 million; 0.53x).
Going forward, the rating agency does not expect borrowings to increase substantially; planned capex of about RM205 million over the next two years is expected to be largely funded through internally generated funds. Cash balances (excluding the balance of IPO proceeds) stood at a moderate RM45.9 million.
For 9MFY2024, revenue grew by 27.1% y-o-y to RM595.4 million, largely driven by an expanded product range. However, operating profit and EBITDA margin declined to 9.5% and 15.4%, due to cost pressures (9MFY2023: 12.0%; 17.3%).
