MARC Ratings upholds AA-IS rating on Farm Fresh

NST Thu, May 09, 2024 04:50pm - 1 month View Original

KUALA LUMPUR: MARC Ratings has upheld its AA-IS rating with a stable outlook for Farm Fresh Bhd's Islamic Medium-Term Notes (IMTN) Programme worth RM1.0 billion.

The outstanding under the rated programme stood at RM300.0 million as at end-April 2024.

The ratings agency said the rating was determined by Farm Fresh's strength as a vertically integrated dairy producer and prominent participant in the local dairy sector, particularly known for its strong presence in the chilled milk segment.

"The rating is also underpinned by the group's strategy of strengthening its upstream operations that would enhance milk supplies and downstream product lines, further increasing its brand presence and earnings diversification," it said.

"These rating factors are mainly counterbalanced by execution risk from recent expansions and margin pressures from raw material price fluctuations," it added.

MARC Ratings expressed confidence in the company, with most of its expansion financed through proceeds from its initial public offering (IPO) rather than relying on bank loans.

"The remaining IPO proceeds of RM137.5 million as at the end of the first nine months of the financial year ended March 31, 2024 (9MFY2024), provide headroom to finance its expansions," it said.

"The increase in borrowings to RM418.7 million was largely incurred for capital expenditure (capex) at its Taiping plant, with the gross debt-to-equity ratio standing at 0.63 times," it noted.

Farm Fresh expanded its operations by acquiring an 828-hectare dairy farm in Taiping, increasing its total farmland to 5,367 hectares and herd size to 10,364 dairy cattle by September 2023.

Its acquisitions of The Inside Scoop Sdn Bhd and Sin Wah Ice Cream Sdn Bhd in 2023 also strengthened its position in downstream dairy products.

Consequently, the rating agency anticipates that there will not be a significant increase in borrowings.

"The planned capital expenditure of approximately RM205 million over the next two years is projected to be primarily funded by internally generated funds," it added.

Farm Fresh's cash reserves, not including the IPO proceeds, amounted to a moderate RM45.9 million.

The rating agency is however mindful of the execution risk associated with the recent expansions and acquisitions, given the potential shifts in consumer preferences.

To mitigate this risk and enable a smooth transition, the group has maintained the role of Inside Scoop's existing founders to lead the ice cream division for the next two years.

The agency understand that Farm Fresh's consumer packaged goods ice cream manufacturing operations will commence in Taiping by end-June 2024, and subsequently be centralised in Bandar Enstek, Seremban; Sin Wah's operations will also be moved to Bandar Enstek. Farm Fresh's milk processing facility in the Philippines will begin operations by end-May 2024.

This facility will produce ready-to-drink products using raw milk from its Australian facility; it will also market UHT products imported from Malaysia.

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