CREDIT ANALYSIS REPORT

FARM FRESH BERHAD - 2022

Report ID 605389004688 Popularity 124 views 17 downloads 
Report Date Apr 2022 Product  
Company / Issuer Farm Fresh Berhad (fka The Holstein Milk Company Sdn Bhd) Sector Manufacturing - Food Products
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC Ratings has affirmed its rating of AA-IS on Farm Fresh Berhad’s Islamic Medium-Term Notes (IMTN) Programme of RM1.0 billion under the Shariah principle of Wakalah Bi Al-Istithmar. The rating outlook is stable

Rationale     
The rating affirmation reflects Farm Fresh’s integrated dairy farming operations, growing sales track record, and strong domestic market position in key dairy segments, underpinned by a steadily improving financial performance. These strengths are moderated by risks associated with the execution of its expansion plans and sudden outbreak of diseases among its biological assets that can impact overall production. 

Farm Fresh currently operates five farms in Malaysia with a total area of 2,829 acres and a herd size of 5,961 dairy cattle as at end-January 2022. These are complemented by a 2,587-acre farm with 2,672 dairy cattle in Greater Shepparton, Australia, bringing the group’s total farming area to 5,416 acres and herd size to 8,633 dairy cattle (March 2020: 4,065 acres; 7,384 dairy cattle). Farm Fresh has the highest number of dairy cattle and the largest production capacity of fresh raw milk among dairy farmers in the country. It has two processing facilities in Malaysia and one in Kyabram, Australia. During the six-month period ending September 30, 2021 (1HFY2022), it processed 37.6 million litres of raw milk, reflecting a 7% y-o-y growth, of which 5.4 million litres were sourced from its Malaysian farms. Alongside this production, Farm Fresh acquires a significant amount of its raw milk requirement through purchases from third-party farmers, mainly in Australia.

MARC Ratings notes that Farm Fresh remains a leading player in the domestic chilled ready-to-drink (RTD) segment, with a market share of 42% as at end-September 2021 and is ranked among the top three in the RTD (chilled and ambient) and yoghurt segments. The rating agency opines that Farm Fresh is well-positioned to benefit from the steady growth of fresh milk consumption in Malaysia which rose by 4.8%  y-o-y in 2021, supported by the commencement of the company’s fourth processing facility in its Taiping farm by June 2022. Marketed under the brands “Farm Fresh”, “Master Barista”, “Henry Jones”, and “Yarra Farm”, its sales growth will continue to be aided by an established multi-distribution network, of which large format retailers accounted for 46.5% of its total revenue at end-September 2021, stockists/dealers for about 30% and hotels, restaurants, cafes for about 16%. Its exports, mainly to Singapore and Brunei, are growing but remain modest at this juncture; however, plans are afoot to tap into Indonesia and the Philippines with an investment of RM40 million for processing facilities, funded by proceeds from the IPO of about RM300 million.

Farm Fresh will use the balance of the proceeds mainly to build a new central region manufacturing hub and a dairy farm in East Malaysia. The IPO has expanded its share capital to about RM380.7 million (pre-IPO: RM87.8 million), which has reduced the group’s leverage to a moderate 0.48x from 0.98x. Given that its expansion plans will be largely funded by the listing proceeds, borrowings, which stood at about RM277 million at end-September 2021, are not expected to rise sharply in the near term. 

During 1HFY2022, Farm Fresh generated revenue of RM257.2 million, with an operating profit of RM40.5 million (1HFY2021: RM234.4 million; RM41.4 million). While production costs have increased, operating profit margin has remained stable at around 15.7% as at end-1HFY2022 (FY2019–FY2021: 14%–18%). Nonetheless, given rising cost pressures from labour, feed and transportation, Farm Fresh has increased its selling price by about 5% for its chilled RTD products in September 2021 and ambient products in December 2021. The rating agency notes that the company currently has sufficient buffer to absorb some cost rise; however, any move to increase selling prices to offset rising cost would need to consider the competitive landscape of the domestic dairy industry. 

Farm Fresh’s adoption of good farming practices and stringent biosecurity measures has been well-recognised, although any sudden negative event affecting its farm operations could bring about additional costs. MARC Ratings notes that Farm Fresh has been proactive in averting supply disruptions by increasing its inventory buffer to a level deemed sufficient.

Rating outlook     
The stable outlook assumes that Farm Fresh will continue to maintain its performance to broadly maintain its credit profile within the rating band.

Rating trajectory     

Upside scenario     
A rating upgrade will be considered if Farm Fresh shows a sustainable growth trend and maintains strong profitability metrics as well as a low leverage position of below 0.5x.

Downside scenario     
The rating could come under pressure if the financial performance deteriorates sharply due to an increase in business risks and/or if a sharp increase in borrowings leads to weaker debt metrics, in particular a leverage ratio of above 0.8x.

Key strengths
Integrated dairy producer with a strong domestic market position in key dairy products
Established farming operations and multi-distribution network
Growing profits and steady margins

Key risks
Executing expansionary plans
Operational risks associated with biological assets


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