KUALA LUMPUR (Feb 28): Dairy producer Farm Fresh Bhd is setting its initial public offering (IPO) price at RM1.35 per share and will have a market capitalisation of RM2.5 billion upon listing with an enlarged share capital of 1.86 billion shares.

This values the company at approximately 69 times its FY2021 (ended March 31) profit of RM36.2 million and 36 times its adjusted profit of RM69 million, after taking into consideration factors that include one-off tax liability expenses which are not part of its core earnings.

The one-off liability and penalty amounting to RM25.7 million for the years of assessment (YA) 2014 to 2020 — which was recognised in FY2021 — is in respect of non-approved locations for certain milk processing plants located in Larkin.

On Dec 24 last year, the group received notice from the Ministry of Finance that its Larkin facility is approved for a new tax incentive under Section 127(3A) of Income Tax Act 1967. Under this incentive, the group is allowed to claim income tax exemption on income from qualifying projects conducted at its Larkin facility for 10 years commencing YA 2021.

At its prospectus launch on Monday (Feb 28), the group shared that it will raise approximately RM1 billion, in an offer for sale of up to 520.2 million of its shares and a public issue of 223 million new shares, based on an initial offering price of RM1.35 per share. This makes it Malaysia’s largest IPO since June 2021.

Farm Fresh will use the proceeds raised via the public issue of approximately RM301 million for establishing a new manufacturing hub, dairy farm and integrated processing facility in Malaysia, the expansion of a production facility in Australia, regional expansion outside Malaysia as well as working capital together with listing expenses.

Farm Fresh noted that the IPO has secured support from a record number of 30 cornerstone investors, the most seen in a Malaysian IPO to date.

The 30 cornerstone investors are Abrdn, Affin Hwang Asset Management, AIA, Alcea Rosea (Creador), Barings Singapore, Eastsprings Investments, Employees Provident Fund, Fortress Capital Asset Management, Franklin Templeton Asset Management (Malaysia), Great Eastern Life Assurance (Malaysia), Hong Leong Asset Management, Hong Leong Assurance, JP Morgan Asset Management (Singapore), KAF Investment Funds, Kenanga Investors, Kumpulan Wang Persaraan (Diperbadankan), Lembaga Tabung Haji, Manulife Investment Management, Maybank Asset Management, Merit Glory (Ikhlas Capital), New Silk Road Investment, OAKS Emerging Umbrella Fund, Permodalan Nasional Bhd, Principal Asset Management, Social Security Organisation, UBS Asset Management (Singapore), UOB Asset Management (Malaysia), Urusharta Jamaah, Value Partners Hong Kong and Zurich Life Insurance Malaysia.

The cornerstone investors will take up approximately 80% of the institutional offering tranche under the IPO, Farm Fresh said.

The group, which has been in operations since 2009, reported a profit after tax of RM36.2 million in FY2021, which marked a compound annual growth rate (CAGR) of 14.9% compared to its profit after tax of RM27.4 million in FY2019.

For FY2019 to FY2021, the group’s CAGR for revenue was 65.9% from RM178.2 million to RM490.5 million.

Farm Fresh group managing director and group CEO Loi Tuan Ee said that the growth of the group reflects the benefits of being a vertically integrated producer of dairy products.

“Our 'grass-to-glass' model and presence across the entire spectrum of the dairy industry provides us with various strategic and financial advantages that differentiates us from our competitors.  Our home dealer network, which is the largest in the country amongst vertically integrated dairy companies, extends our reach and enables us to achieve greater penetration of our products.

“We are well positioned to capitalise on the sustained strong consumer demand for fresh milk products in addition to addressing the insufficient local milk production visible today. Post-listing, Farm Fresh will endeavour to execute our plans to continue gaining market share and growing our sales in Malaysia and abroad. By optimising our growth, we endeavour to reward our shareholders through the adopted dividend policy that targets to return 25% of our annual earnings to shareholders,” he said.

Loi acknowledged that like other dairy companies, Farm Fresh has also been impacted by high animal feed costs. However, he said the group only decided to raise prices last year, that too was the first time the group had done so in four years.

“We raised prices for our chilled ready-to-drink milk products and ultra-high temperature processing ready-to-drink products last year. [Prior to that], we had not raised prices for four years and deliberately so, and we were still able to grow [profit] with a reasonable margin. Last year, the headwinds were just too strong and therefore we imposed a 5% price increase.” he said.

The group is the second-largest player in the ready-to-drink milk category for the first nine months of 2021, commanding an 18% market share, according to Frost and Sullivan.

Farm Fresh also noted that it is the market leader in the chilled ready-to-drink milk segment with a market share of 42% for the nine months ended September 2021. The group is also the third largest player in the yogurt category, with an 11% share of the Malaysian market, Farm Fresh added.

Applications for the public issue portion are open from Monday (Feb 28) and will close at 5pm on March 8. The group is scheduled to be listed on the Main Market of Bursa Malaysia on March 22.