Farm Fresh's RM2 bil IPO valuation appears justified, say analysts

Farm Fresh's RM2 bil IPO valuation appears justified, say analysts

KUALA LUMPUR (Feb 18): Analysts say the RM2 billion valuation that Main Market-bound Farm Fresh Bhd is said to be looking at from its initial public offering (IPO) appears justified.

The Khazanah Nasional Bhd-backed dairy producer, which is expected to be listed within the first quarter of the year, has yet to announce its IPO pricing.  

When contacted, Malacca Securities Sdn Bhd senior analyst Kenneth Leong said a back-of-the-envelope calculation showed that Farm Fresh should be valued at about 60 times price-earnings (P/E) multiples based on the company’s profit after tax (PAT) of RM32.83 million for the financial year ended March 31, 2021 (FY21).

Stripped off its one-off tax liability and penalty of RM25.71 million, Leong said Farm Fresh’s normalised PAT of RM58.54 million should value the company close to 30 times P/E multiple.

Compared to its peers, Farm Fresh’s valuation is sitting somewhere between Nestle (Malaysia) Bhd, Dutch Lady Milk Industries Bhd and Fraser & Neave Holdings Bhd (F&N), he said.

The trailing 12-month price-earnings (TTM P/E) ratio was 53.6 times for Nestle, 25.1 times for F&N and 24.4 times for Dutch Lady, according to Bloomberg.  

Another analyst, who requested anonymity, expects Farm Fresh to be valued at mid-20 times P/E, on par with F&N and Dutch Lady’s valuation.

Both analysts believe that Farm Fresh’s P/E valuation is justified, taking into account the company’s growth prospect and its leading market share in the ready-to-drink milk category.

Leong said the company can ride on the population growth and enjoy the benefits of economic reopening, which is a catalyst to spur demand for its products.

Meanwhile, another analyst believes Farm Fresh can continue to chart strong earnings growth going forward, which will be driven by its increasing herd size for dairy cattle.

“One of the key drivers, which is their dairy cattle, has been increasing. As long as the company continues to allocate capex for farming, it should be able to continue to grow,” he said.

He also observed that Farm Fresh’s products have gained popularity, given its shelf place in the retail stores has been expanding over the years.  

“Another [comparative] advantage for Farm Fresh is being an integrated dairy farming player, covering from (upstream) farming activity until (downstream) manufacturing, whereas its peer does not have in-house dairy farming and buying from others,” he added.

Farm Fresh is Malaysia's second-largest player in the ready-to-drink milk category with a market share of 18%, and the third-largest in the yoghurt category with a market share of 11% for the first half of 2021, according to the company’s IPO draft prospectus posted on Securities Commission Malaysia website.

The company operates five dairy farms in Malaysia and one in Australia, with a total herd size of 9,000 dairy cows and bulls. It also owns and operates two processing facilities in Malaysia, with the capacity to produce around 137 litres of finished goods annually and one processing facility in Australia, with the capacity to produce 84 million litres of processed milk annually.  

From FY19 to FY21, the company's PAT attributable to owners grew at a compound annual growth rate (CAGR) of 14.9% from RM27.4 million to RM36.2 million, while its revenue increased by a CAGR of 65.9% from RM178.2 million to RM490.5 million.
Passing down additional costs to end-users

Amidst the industry-wide practice of increasing commodity prices, analysts expect Farm Fresh to be able to pass down the additional costs to end-users and protect its margin, given customers’ "stickiness" towards its products.

MIDF Research, in an emailed response, said as with any other consumer staple companies, inflation is an issue at the moment.

“There could be potential headwinds for the sector as whole, with the rise in raw material prices due to inflation. In order to maintain margins moving forward, companies in the sector might have to resort to passing on the higher raw material prices to consumers and hike prices.

"However, with its innovative distribution business model such as the home dealers system, we opine that there is a possibility that the company will be adaptable to navigate future business challenges,” said the research firm.

“While fresh milk is a staple in Malaysian households, an increase in the price of milk could result in the price-sensitive consumers resorting to more affordable brands, considering the concurrent increase in the price of other household items. However, we note that the wide-range of milk options that the company offers, which includes plant-based milk, will remain a strong factor to maintain customer stickiness, despite potential price hikes,” it added.

Meanwhile, another analyst said Farm Fresh is also able to pass down the additional cost via innovation by adjusting the products pricing in the form of providing value added features to convince the customers to buy.

Bloomberg, citing sources, reported last week that Farm Fresh had attracted almost 30 cornerstone investors, including Aberdeen Standard Investments and AIA Group Ltd, in a planned IPO.

Great Eastern Life Assurance, Franklin Templeton Investment and some Malaysian state funds had also signed on, and the first-time share sale is expected to raise about RM1 billion, the report said.

Farm Fresh’s IPO is set to be the country’s biggest since last June, when CTOS Digital Bhd, which runs a credit reporting agency, and its shareholders raised RM1.21 billion.

On Tuesday (Feb 15), Farm Fresh signed an underwriting agreement with CIMB Investment Bank Bhd (CIMB IB), Maybank Investment Bank Bhd, Affin Hwang Investment Bank Bhd, AmInvestment Bank Bhd, Hong Leong Investment Bank Bhd and RHB Investment Bank Bhd for its IPO.

The IPO — of up to 743.2 million shares in Farm Fresh — comprises an offer for sale of up to 520.2 million existing shares and a public issue of 223 million new shares. The 743.2 million IPO shares comprise an institutional offering of up to 687.4 million IPO shares and a retail offering of 55.7 million issue shares.

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