Rhonema: Milk Not Enough

 

Rhonema was listed on the main market of Bursa in December 2016 at an issue price of 75sen.

It is mainly involved in manufacturing and distribution of animal health products to livestock industry, as well as distribution and supply of food ingredients to food manufacturers.

The animal health products include pharmaceuticals, vaccines, feed & feed additives etc, are mainly for the poultry & swine segment. 

In early 2020, the company expanded into the ruminant segment (cow) by acquiring 49% stake in 3 companies.

This acquisition includes a small dairy farming business which produces fresh milk which is sold to wholesalers.

Rhonema mentioned that it has a plan to grow this dairy farming business and did not rule out venturing downstream to have its own brand of fresh milk products in the future.

That's one of the main reasons I decided to invest in Rhonema.

Rhonema aims to import and breed purebred Holstein A2A2 cows, which produce fresh A2 milk.

The two most common type of proteins in cow milk are A1 and A2. There are claims that A1 protein might trigger stomach discomfort similar to lactose intolerance.

A1 protein is even linked to diabetes, heart disease, sudden infant death syndrome and autism etc. However, those links are not confirmed.

A2 milk is marketed as a healthier choice without such troublesome issues.

It's reported that Rhonema is the first producer offering fresh A2 milk in Peninsular Malaysia.

Its has a 6-acre farm located in Batang Kali. From recent NST report in Sep21, currently it has 250 cows and plans to increase it to 350 by the end of this year.

It produces average 55,000 liters fresh milk per month at the moment, and might reach 150,000 liters per month by year end.

It expects to have 500 cows within 2 years.

Last month Rhonema, via its indirect 49%-owned A2 Fresh Sdn Bhd, announced a joint venture with Kulim Berhad to "develop, operate and manage a potential dairy project".

Kulim is a well-known plantation giant which was taken private and delisted from main board in 2016. It's a subsidiary of Johor Corporation.

Johor Corp owns famous brands such as KPJ, KFC, Pizza Hut, Ayamas, Life etc.

Establishing dairy farms and processing plants requires huge investment of few hundred millions ringgit. No doubt Kulim will be the main source of funding.

In this JV, Kulim owns 65% shares, while A2 Fresh S/B holds 35% shares. Since A2 Fresh S/B is 49% owned, Rhonema will have just 17.15% share in this dairy project.

This is a bit low for me, a 25-30% shares would be great.

The initial investment requirement of the dairy project is estimated to be approximately RM41mil. Thus it will be RM7mil for Rhonema.

It has an aim to produce up to 11 million liters of fresh milk a year.

Malaysia plans to achieve 100% fresh milk self-sufficiency by 2025. However, increasing fresh milk consumption by Malaysians has widened the deficit from 13.3mil liters in 2014 to 26.1mil liters in 2020.

From statistics, Malaysia's annual fresh milk production increases from 27.02 liters in 2012 to 36.61 liters in 2017. It reaches 40.6 liters in 2019 but it still falls short of 68.8 liters consumed in 2019.

This deficit of fresh milk has to be imported.

Thus, there are a few listed companies seeing this as an opportunity.

F&N kickstarted its venture into dairy farming business in the end of year 2019 by proposing to acquire a huge tract of land at Chuping from MSM to turn it into its dairy farm.

However, the deal was later cancelled as relevant approval was not obtained. It's indeed a setback to F&N's ambition to diversify into dairy farming in Malaysia.

FGV has successfully started its dairy farm project since Mac 2020, which includes both dairy farming and fresh milk processing business.

It has already come out with its own fresh milk brand known as "Bright Cow".

According to news report, FGV has a total of 258 dairy herd size in its Linggi farm in the end of year 2020. This is almost similar to Rhonema's herd count of 250 now.

Farm Fresh, backed by Khazanah Nasional, should be the largest fresh milk producer in Malaysia. 

Its revenue grows a whopping 175% in the last 2 years from RM178mil to RM490mil, while the PATAMI grows just 32% from RM27.4mil to RM36.2mil.

Farm Fresh has 3,009 milking cows in Malaysia and Australia. It's not too bad if Rhonema achieve its target of 350 cows by year end.

If Rhonema milk production really can reach 150,000 liter per month this year, this is 1.8 million liters per year compared to Farm Fresh's farms in Malaysia with 8.9 million liters per year.

Farm Fresh's revenue from sales of raw milk alone is not spectacular at RM23.7mil compared to sales of dairy products at RM423.8mil.

So it's good for Rhonema and its partner to have their own brand. 

Of course it's not a simple task to penetrate the market and gain a significant market share. Farm Fresh started in 2010 and takes 10 years to reach current state.

Currently Farm Fresh has 18% market share in Malaysia for Ready-To-Drink milk. Dutch Lady is still the big brother in this segment but its market share has been eroded.

RTD milk market is highly competitive. Rhonema and its partners seem to concentrate on A2 fresh milk which might differentiate them slightly from others.

Surely this investment will incur loss in the initial stage. Whether it can grow to gain significant market share will depend very much on the capability of the management team.

Is Kulim Berhad the right partner to get the job done? It's still too early to comment.

Anyway, Farm Fresh will be listed in the stock market soon. I've never subscribed to any IPO before but I think Farm Fresh might be my first.

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