KUALA LUMPUR (May 9): Maybank Investment Bank (Maybank IB) on Monday (May 9) initiated coverage on Farm Fresh Bhd with a "buy" rating and a target price of RM1.95, underpinned by its three-year net profit compound annual growth rate (CAGR) of 23%.

Maybank IB's Jade Tam said in a note that she estimated a three-year (FY21 [ended March 31, 2021] to FY24) core net profit CAGR of 23% to be largely driven by a three-year revenue CAGR of 15% and an increase in gross profit margins to 31% in FY23 to FY24, from 28% in FY21 to FY22.

“This comes on the heels of Farm Fresh’s recent 5% product price hike for its chilled ready-to-drink (RTD) and ultra-high-temperature (UHT)/ambient milk categories which collectively accounted for 76% of revenue in FY21.

“Top-line growth will also be supported by Farm Fresh’s progressive growth in processing milk volume from FY22 to FY24,” she said.

Her target price of RM1.95 pegs Farm Fresh’s earnings to 2023 simple weighted average price-earnings ratio (PER) of its domestic dairy-related peers of 29 times.

“The group’s three-year (FY21 to FY24) core net profit CAGR of 23% compares favourably against its listed dairy-related peers of -2.3%, as does its price/earnings-to-growth (PEG) of 1.1 times at the current price of RM1.69, relative to its peer average of 3.4 times,” she said.

At the time of writing, Farm Fresh's share price was unchanged at RM1.69, valuing the group at RM3.14 billion. The counter has risen 34 sen or 25.19% from its initial public offering (IPO) price of RM1.35.

According to Tam, her "buy" rating for Farm Fresh is underpinned by its dominant dairy industry presence, strong management and robust earnings growth potential.

“The latter will be largely driven by ongoing expansion plans in both dairy farming and processing facilities, which in turn will propel its market share higher within the fresh milk-based product market,” she said.

She noted Farm Fresh also has plans to penetrate into new regional markets in the near term (eg Indonesia, Philippines, Hong Kong) while expanding its product range to include ice cream and kids growing-up-milk (liquid milk) in order to compete with incumbent powdered-milk products.

Leveraging the quality and popularity of its products amongst consumers, she said Farm Fresh has devised future expansion plans in its upstream and midstream segments to cement its leadership position within the industry while also driving volume growth through new stock keeping units (SKUs) and product innovation.

As at September 2021, Farm Fresh has grown into the second largest player in the total RTD milk (chilled and ambient) category with a market share of 18% of revenue, from a 3% market share in 2015.

At 11.05am, Farm Fresh shed one sen to RM1.68 with 1.51 million shares traded.