MARC Ratings has affirmed its AA-_IS rating 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. 

Farm Fresh remains the largest vertically integrated dairy farming player domestically with a well-established distribution network. It currently operates 2,829 acres of farmland domestically with 6,308 dairy cattle, and 2,538 acres of farmland in Victoria, Australia, with 2,666 dairy cattle as at end-September 2022. The rating affirmation incorporates Farm Fresh’s strong market position, particularly in the chilled ready-to-drink (RTD) segment with a market share of 49.4%, and growing processing capacity from 137.0 million litres p.a. to 197.5 million litres p.a. of finished goods by end-2025. In terms of production output, Farm Fresh has witnessed a 23% y-o-y growth to 46.4 million litres for the six-month period ending September 30, 2022 (1HFY2023). This reflects the growing demand for milk in Malaysia.

Revenue grew by 25.2% y-o-y to RM468.3 million in 9MFY2023, supported by the government’s school milk programme initiated in 2022. Nonetheless, rising cost pressures, particularly from higher dairy raw materials and cattle feed costs, have weighed on operating profit margin which declined to 12.0% (9MFY2022: 15.3%). To mitigate this, the group increased the selling price for its chilled RTD products by an average of 5% in mid-July 2022 for the Malaysian market and by an average of 10% in August 2022 for the Singaporean market. 

We also note Farm Fresh has recently proposed to acquire a 65% equity stake in ice cream retailer The Inside Scoop Sdn Bhd for RM83.9 million, to diversify into the higher margin product in the consumer-packaged goods market. The acquisition, which is expected to be completed in May 2023, will be funded partly by its IPO proceeds amounting to RM63.9 million (21.3% of IPO proceeds) and the balance through new share issuance. MARC Ratings views execution risk associated with any expansion plans following the acquisition as a rating concern given the highly competitive nature of the ice cream retailing segment. 

Of its total IPO proceeds of RM300.1 million, Farm Fresh had utilised 28.5% as at end-9MFY2023 mainly for production capacity expansion. Borrowings rose to RM351.5 million, translating to a moderate gross debt-to-equity ratio of 0.56x as at end-9MFY2023 (FY2022: RM284.6 million; 0.47x). However, over the medium term, we do not expect any sharp increase in borrowing levels given its expansion plans would still be funded by the balance of IPO proceeds. 

Cyndy Goh, +603-2717 2941/ cyndy@marc.com.my  

Umar Abdul Aziz, +603-2717 2962/ umar@marc.com.my   

Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my