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· We maintain BUY on Malayan Flour Mills (MFM) with a higher fair value of RM1.33/share (vs. RM0.69/share previously). Our fair value of RM1.33/share is based on a fully diluted FY22F PE of 18x instead of FY21F originally.
· We have assumed a higher PE of 18x vs. 15x previously as we believe that MFM would benefit from having Tyson Foods as a partner. MFM would be able to leverage on Tyson Foods’ global customer network.
· Globe Newswire announced that Tyson Foods and Malayan Flour Mills have formed a partnership, in which Tyson Foods will invest 49% in MFM’s poultry division. The investment sum for the 49% stake was not disclosed.
· We have not factored the disposal of the 49% stake in the poultry division in MFM’s FY22F net profit yet. We believe that any loss of earnings from the disposal of the 49% stake would be compensated by higher interest income (from the disposal proceeds) or lower interest expense (from the repayment of borrowings).
· As at end-FY19, the poultry division’s gross asset value was RM1.0bil. We do not know the division’s liabilities. Assuming a price to gross asset value of 1.0x, the sale of the 49% stake in the poultry division would generate cash of about RM490mil. MFM would be able to use the cash to pare down borrowings, which stood at RM1.2bil as at end-FY19.
· More importantly, Tyson Foods would be able to help boost the earnings of MFM’s poultry plant in Lumut by being an off-taker. MFM would be able to sell some of its poultry products at the Lumut plant to Tyson Foods, which has a global network of customers.
· Currently, we forecast that MFM’s poultry division would break-even in FY21F after a loss of RM44.5mil in FY20E. We expect the poultry division to record an EBIT of RM23.6mil in FY22F. The poultry division recorded a loss before interest and tax of RM54.9mil in 9MFY20.
· MFM’s poultry plant in Lumut started operations in late-FY19. We believe that the poultry plant is currently operating at an utilisation rate of 40% to 50%. Due to Covid-19, which has resulted in limited dine-in at restaurants, the plant suffered from a drop in poultry demand on FY20. The plant has a total production capacity of 280,000 birds per day.
· We think that HORECA accounts for 60% of MFM’s poultry sales currently. We believe that MFM’s exposure to the live birds market has declined to 40% from 50% due to the commissioning of the poultry plant in Lumut in late-FY19.
