IPO – FARM FRESH
Application date: 28-02-2022
Deadline: 08-03-2022
Draw date: 11-03-2022
Stock distribution date: 18-03-2022 Listing date: 22-03-2022
IPO price: RM1.35
Issuer: TIIH
Sector: Main Board (Main Market)Business: Dairy producer
Background
Incorporated in Malaysia on 24 Mar 2010 under the name of Holstein Milk Company Sdn Bhd as a private limited company. On 24 May 2021, the company changed its name to Farm Fresh Sdn Bhd and converted into a public company.
The history of their business can be traced back in 2009 when the founders, Loi Tuan Ee and Loi Tuan Kin, commenced dairy farming operations under FFMSB involving in the rearing of goats and sale of goats’ milk. With the help of Azmi Bin Zainal and investment support from Khazanah, they established their Muadzam Shah Farm in Pahang which became fully operational in 2014 with a focus on rearing dairy cows. The founder, Loi Tuan Ee is holding 70% stake while Khazanah Nasional has about 30% of the stake. FYI, Agrifood Resources is a subsidiary of Khazanah Nasional. Fresh Farm empowers micro-entrepreneurs to generate sustainable income through the distribution of products in the community. By 2021, the company has more than 800 home marketers and 38 regional distributors, covering every state in Malaysia.
Business Model
The company is involved in rearing dairy cows and sales of dairy cows’ milk whilst, together with their subsidiaries, they form a fast-growing vertically integrated dairy group engaged in the business of farming, manufacturing and distribution of various dairy products and plant-based products.
The company has a diverse product portfolio that consists primarily of chilled RTD milk products, ambient RTD products, plant-based products, yogurt products and fruit jam and sauces. They also generate revenue from the sales of other products, including beef and kurma, as at the LPD. They have stopped selling raw milk they produce to third parties since end of September 2021.
According to the Frost & Sullivan report, Farm Fresh ready-to-drink milk accounts for 18% of the overall market share in Malaysia.
Currently, other peers do not have their own dairy farming and they must source from other suppliers.
The company’s main customers are from large retailers, Lotus and Aeon.
Details of the use of proceeds
1. Within 2 years, the company wants to set up a new production centre, a new dairy farm, and a comprehensive processing facility will be built. (46.5% of proceeds)
2. Expanded production line in Kyabram, Australia, with operating capital (19.9% of proceeds)
3. Expansion outside Malaysia (13.3% of proceeds)
4. Working capital (13.6% of proceeds ) 5. Listing fees (6.7% of proceeds)
Key Financials
Revenue
Contributed by higher sales volume in dairy products and plant-based products, as well as contributed by the acquisition of Henry Jones Foods’ products’ assets and jam business in December 2019.
Gross Profit and Margins
2019 – 2020: Low initial utilisation at Muadzam Shah Facility, IXL acquisition and higher animal feed cost due to dry seasonal weather in Australia
2020 – 2021: Lower product manufacturing COGS and higher UHT/ambient products sales and introduction of plant-based products
FPE 2020 – 2021: Overall increase in input costs and negative gross margins incurred by Australia’s fruit jam operation.
Profit After Tax and Margin
PAT margin dropped to 6.7% in 2021 due to recognition of Additional Tax Liability (ATL) of MYR 25.7mil in FYE2021. For illustration, assuming the ATL is allocated to the respective financial years, the adjusted PAT margin would increase to 14.1% in 2021.
PAT margin rose to 19.2% in FPE 2021 due to reversal of the tax payable amount of MYR 10.49mil previously recorded in FYE 31 Mar 2021, pursuant to the Larkin Facility Tax Incentive.
Revenue drivers – Average Selling Prices (ASP)
Malaysia
Revenue growth contributed by the increase in sale volume of dairy products from FY2019 – FY2021, and from FPE 30 Sep 2020 to FPE 30 Sep 2021, partially offset with a slight decrease in ASP, due to change in product mix towards lower-priced products, including from private label products.
ASP of plant-based products increased for FPE 30 Sep 2021 due to higher sales of almond and oat milk products which carry a higher selling price.
Singapore
Revenue growth from Singapore was contributed primarily by the increase in sale volume of dairy products for both FYE 31 Mar 2020, 2021 and FPE 30 Sept 2021 respectively, partially offset by a decrease in SDP of dairy products due to higher sales of full cream milk and skinny milk products which carry a lower selling price. Sales of plant-based products at Singapore only commenced in Oct 2020.
Competitive Strength
1) One of the largest and fastest-growing players in the attractive Malaysian dairy industry
* Committed to producing fresh and quality dairy products
* Nutrient-rich and affordable dairy products made with fresh milk and free from preservatives and colourings
* Strong market position and growth track record across categories
2) Attractive and diversified portfolio of proprietary brands built on a fresh milk proposition and supported by a culture of innovation
* Well diversified product portfolio, enabling Farm Fresh to capture a wide addressable market
3) Vertically integrated “grass-to-glass” model providing operational and financial benefits
4) Strong competitive advantage through gene bank ownership and notable farm management and animal husbandry practices
5) Extensive market penetration through a multi-channel distribution network
* Distribution channels such as large format retailers, stockists, home dealers, HORECA, convenience store, petrol companies etc
6) Strong and experienced management team with significant emphasis on ESG initiatives
* Since 2014, implemented regenerative agriculture processes that treat solid and liquid animal waste for reuse in operations
* Target to implement such processes across all farms in next 3 years.
* Target for 25% reduction of greenhouse gas emissions in 5 years to reduce carbon footprint
* Increased percentage of recycled packaging requirements to be sourced from Tetra Pak
Since Farm Fresh is a high-growth company and the company continues to expand its business, their Net Gearing Ratio has increased from RM0.37 in 2019 to RM0.98 in 2021.
3 Strategies to Strengthen Position as One of The Leading Malaysian Dairy Players & Expand Market Share Outside Malaysia
1) Continue to develop and grow the product portfolio
a) Attractive Growing-Up milk segment
b) Strategic window of opportunity via schools
c) additional growth opportunities via adjacent product categories
2) Leveraging on gene bank ownership and notable farm management & animal husbandry practices to scale farm area
– Leverage on upstream businesses to expand the scale
– constantly evaluating opportunities for expansion
3) Expand production capacity in the midstream segment
For Midstream…
Short Term
– Installation of a filling and packaging line at Muadzam Shah Facility in April 2022
– Setting up of two new processing facilities at UPM Farm and Taiping Farm by Feb 2022 and Jun 2022 respectively
Long term
– Intend to establish a new manufacturing hub in the Central Region of Peninsular Malaysia within 24 months from Listing
– Plan to establish a new dairy farm and integrated processing facility in East Malaysia, expected to be completed by the first quarter of 2024.
For Downstream…
– Leverage on proven home dealer program and operational platform to continue to scale stockist and home dealer network
– Expand and capitalize on existing distribution channels in Malaysia by growing distribution footprint
– Identified a number of a large convenience chains with nationwide store footprint to carry Farm Fresh’s products
Advantages of Farm Fresh IPO
1) Set up a 25% dividend policy.
2) Malaysia’s only integrated dairy farming industry, covering upstream farming activities to downstream manufacturing.
3) Take fresh milk as the main basis, and have a diversified product portfolio.
4) Possess the ownership of the gene pool, including the strong competitive advantage of farm management and animal husbandry practices, and achieve extensive market penetration through a multi-channel distribution network. FB & Shopee online sales reached 35%.
5) A strong management team with extensive management experience.
Key Risks
- Rising operational expansion costs could materially and adversely affect their business, financial condition, results of operations and prospects.
- Demand may decline due to changes in consumer preferences.
- Dairy industry, especially the downstream business is highly competitive.
- Maybe affected by pandemics of infectious disease, or other health epidemics, natural disasters, terrorist attacks, armed conflicts and other events beyond their control.
- Over 85% of their products sold through a distribution network comprising of large format of retailers, stockists, home dealers, HORECA, export markets and convenience stores.
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