Farm Fresh’s proposed buy of Inside Scoop earnings-accretive, synergistic, say analysts

TheEdge Thu, Feb 16, 2023 10:55am - 1 year View Original


KUALA LUMPUR (Feb 16): Analysts expects Farm Fresh Bhd’s (FFB) proposed acquisition of a 65% stake in The Inside Scoop Sdn Bhd (TISSB) for RM83.9 million to be earnings-accretive and synergistic. 

Maybank Investment Bank said the acquisition of TISSB could lift FFB’s net profit by RM3.8 million per annum, and it offers various positive business synergies across FFB’s existing value chain and potential foray into the consumer-packaged goods ice cream market.  

“Assuming TISSB’s financial year 2022 profit after tax of RM7.8 million sustains, this acquisition could lift FFB’s net profit by RM3.8 million per annum,” the research house said in a note on Thursday (Feb 16). 

It maintained its earnings estimates and target price (TP) of RM1.75 for FFB, implying a 29 times calendar year 2023 (CY2023) price-earnings ratio (PER), based on the Malaysian dairy-related peer average.

It said the acquisition multiple equates to 16.5 times one-year trailing PER, which is below FFB’s 38 times PER estimated for the financial year ending March 31, 2023 (FY2023).

Maybank IB noted that while the acquisition will be subjected to shareholders' approval, FFB plans to fund the cash consideration portion of the acquisition (RM63.9 million) via its initial public offering proceeds. 

Meanwhile, CGS-CIMB said the acquisition of TISSB is undemanding (based on TISSB’s CY2022 PER), at a 59.5% discount to Malaysia's overall consumer sector CY2022 PER of 40.7 times, and at a 57% discount to FFB’s CY2022 PER. 

In addition, it said, FFB has no issue funding the cash portion of the acquisition, with its net gearing of 0.1 times at end-2QFY2023.

Based on back-of-envelope calculations, the research house in a separate note on Thursday said the acquisition would increase its FY2024-25 earnings per share estimates by 3.7%-4.6%.  

This is assuming a uniform TISSB net profit of RM7.8 million across FY23-25, accounting for a 0.7% enlargement in FFB’s share base from issuance of new shares and borrowing cost of 4.5% to fund the cash portion of the acquisition.  

“This would potentially lift our TP by 3.9% to RM1.71 (unchanged 28 times CY2024 PER),” said CGS-CIMB, which maintained its "hold" call on the stock, with a revised TP of RM1.65.  

The research house said the current valuations had largely priced in FFB’s growth prospects (a three-year core EPS growth of 10.5%) and growing demand for fresh milk goods in the Asia region.

Read also:
Farm Fresh to acquire 65% stake in The Inside Scoop for RM83.9m

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