Malayan Flour Mills Bhd
(March 11, 74 sen)
Initiate coverage with buy and fair value (FV) of 89 sen: We initiate our coverage on Malayan Flour Mills Bhd (MFM) with a FV of 89 sen per share. Our FV for MFM is based on financial year ending 2019 forecast (FY19F) of fully diluted (FD) price-earnings (PE) of 15 times. Our PE assumption of 15 times is 20% below the poultry sector’s — eggs and broilers — average PE of 18.8 times. From FY12 to FY17 — disregarding FY18’s poor earnings — MFM’s PE were a low 8.7 times to a high 34.9 times. The average PE was 15.9 times.
MFM’s FY19F basic PE is forecast at 9.4 times compared with CAB Cakaran Bhd’s 12.8 times and PWF Consolidated Bhd’s 10 times. MFM’s FD FY19F PE is estimated at 12 times. MFM is primarily involved in the flour milling and poultry businesses. In the poultry space, MFM produces broiler chickens. MFM’s competitors in the broiler business are Huat Lai Resources (privatised) and CAB Cakaran. MFM’s competitors in the flour milling business are PPB Group Bhd’s Federal Flour, Interflour Holdings and Kuantan Flour Mills Bhd.
MFM is a buy because its FD PE of 12 times for FY19F and 10.3 times for FY20F are undemanding. Nowadays, a decent consumer-related company trading at low PE valuations is a rare find. MFM’s dividend yields are forecast at 4.2% for FY19F and 4.9% for FY20F. Another reason is after a weak FY18, we forecast MFM’s net profit to improve 293.8% in FY19F and 16.9% in FY20F as operations normalise and contributions from the new poultry and aqua feed plants come in. MFM’s poultry division was hit by a disease and a falling selling price of live birds in FY18. The group’s flour division was affected by high wheat costs in Malaysia in FY18.
MFM is expected to be one of the largest integrated poultry players in Malaysia in FY20F upon its poultry processing plant’s completion in Lumut in the third quarter of FY19. This is expected to sustain MFM’s earnings growth and operating profit margin in the long term. With an installed production capacity of 240,000 chickens per day, MFM’s position as the biggest producer of broilers locally would be entrenched. MFM would be involved in almost every segment of the value chain from rearing day-old chicks to the production of broilers.
MFM’s balance sheet is expected to be cleaner after the RM220 million rights and redeemable convertible unsecured loan stocks issues. We forecast its net gearing to decline to 88.6% as at end-December 2019, from 116.7% as at end-December 2018. — AmInvestment Bank, March 11