CREDIT ANALYSIS REPORT

THE HOLSTEIN MILK COMPANY SDN BHD - 2021

Report ID 6053645 Popularity 136 views 67 downloads 
Report Date Apr 2021 Product  
Company / Issuer The Holstein Milk Company Sdn Bhd Sector Manufacturing
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Rationale
Rating action     
MARC has assigned a preliminary rating of AA-IS with a stable outlook to The Holstein Milk Company Sdn Bhd’s (THMC) proposed RM1.0 billion Sukuk Wakalah Programme. THMC is an integrated dairy farming player with operations ranging from cattle breeding and milk processing in Malaysia and Australia, to distribution of dairy products to consumers, mainly domestically. 

Rationale
The assigned rating is driven by THMC’s growing market share in the dairy industry and its improving profitability, characterised by strong operating profit margins and a moderate leverage position. It has a leading market position in the growing chilled fresh milk segment. These strengths are counterbalanced by risks associated with rapid expansion and biological assets.

THMC has sizeable farm acreage with four farms - two in Johor, and one each in Selangor and Pahang - covering 1,510 acres and housing 5,887 head of cattle as at end-December 2020. It also has an existing 2,555-acre farm with 2,618 head of cattle in Victoria, Australia. Coupled with the recent addition of 500 acres to its existing farm in Muadzam Shah as well as a soon-to-be-completed 828-acre farm and processing plant in Taiping, THMC’s expansion will further strengthen its market position.

During financial year ended March 31, 2020 (FY2020), THMC produced 24 million litres of milk from its farms, with its Australian farm accounting for twice the collective output of its Malaysian farms, largely due to the difference in cattle breed. Its cattle in Malaysia are of the Australian Friesian Sahiwal (AFS) breed whereas those in Australia are of the Holstein breed, which provide higher milk yield. This notwithstanding, the AFS breed, a cross between the Sahiwal breed from India and the Holstein breed, is considered to have stronger resilience to tropical conditions and diseases, and provides higher milk yield relative to local breeds in tropical climate.

MARC understands that THMC adheres to best farming practices and has received accreditations from relevant bodies to this effect; it vaccinates its cattle twice a year to mitigate against disease, while the location of its farms in different geographies alleviates the risk of contagion. THMC has a good track record in managing its transport logistics; the group uses refrigerated tank trucks to transport milk from its farms to the nearest plant either in Muadzam Shah or Larkin. This is crucial given that milk is a perishable product and has to be maintained at below 4 degrees Celsius (°C) throughout the process.

THMC currently has 17 production lines, equipped with machinery from established suppliers, namely AVE (UK), Galdi (Italy), and Tetrapak (Sweden-Switzerland) for downstream processing into chilled fresh milk, flavoured milk, ultra-high temperature (UHT) milk as well as other dairy products. Its milk production growth, which includes purchased milk, has been strong with output increasing to 70.6 million litres in FY2021 from 46.2 million litres in FY2020. A majority of its purchased raw milk is processed in-house at its new plant in Kyabram which was completed in October 2020, before being shipped (in liquid or frozen state) to Malaysia. With regard to an existing contract to sell raw milk from its Australian farm to a third party for processing, the company will decide whether to continue with this practice when the contract expires in June 2021 or to shift processing to its Kyabram plant instead.

Despite the growth in THMC’s herd size through farm expansion, the company has relied on milk purchased from third parties to meet demand growth. In FY2020, THMC purchased an additional 38 million litres (or about 83% of its total milk production). THMC has maintained supply stability through purchases from third parties; it has a large pool of dairy farmers that mitigates supply disruptions.

THMC has steadily grown its market share in milk products to 15.6% in January 2021 from 9.4% in the previous year’s corresponding period to become the second-largest player in the domestic dairy industry. In terms of the fast-growing and premium chilled fresh milk segment, it has a dominant 36% market share as at end-2020. In the ambient milk segment, the company has also doubled its market share to 8% in 2020 within two years of entry. THMC has used innovative multi-channel distribution networks, particularly its home dealers network, to accelerate market penetration. The network, which generates about 35% of total revenue as at end-2020, has reduced THMC’s advertising and marketing costs while providing a platform for micro-entrepreneurs to market its dairy products.

Between FY2016 and FY2020, revenue grew sharply with a compound annual growth rate (CAGR) of 53.3% to RM303.1 million, chiefly driven by sales of chilled fresh milk and UHT milk, accounting for 56% and 28% of revenue for FY2020. Its operating profit margin has ranged between a healthy 14% and 19% over the period. Total borrowings stood at a moderate RM148.7 million but is expected to grow to fund its additional processing facilities in Perak and Johor as well as to grow its herd size. Its capex, estimated at RM400 million over the next four years, could also be supported by a potential equity fundraising. This would strengthen the balance sheet debt-to-equity (DE) ratio, projected to decline to below 0.40x from 0.73x.

Rating outlook     
The stable outlook assumes THMC would maintain its credit profile on the back of well-contained production costs as well as steady earnings and cash flows.

Rating trajectory

Upside scenario     
An upgrade in the near-term is unlikely given that the company is in the midst of executing its growth plans that may entail additional risks. Over the medium term, any upgrade could be considered if there is a sustained improvement in profitability metrics while maintaining a moderate leverage position of below 0.5x.

Downside scenario     
The rating could come under pressure if its financial performance deteriorates substantially below projections and/or borrowings rise to a level where its leverage increases above 0.8x.

Key Strengths
Fast-growing dairy player with growing domestic market share
Integrated dairy farming operations support steady operating margins
Management expertise in dairy farming
Multi-channel distribution network

Key Risks
Executing expansionary plans
Operational risks associated with biological assets
Keen competition in dairy product segment

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