Farm Fresh saw its gross margin decline 3.4% year-on-year (y-o-y) in FY2023, as raw milk prices soared 31% y-o-y.

CGS-CIMB analyst Prem Jearajasingam in a note today said the group expects raw milk prices to ease 14% y-o-y, following the fixing of farm-gate prices on July 23.

Farm-gate price refers to the price received by farmers for their agricultural products at the point of production or at the farm gate.

“This, together with a 5% price increase from July 1, 2023, will by our estimates take the gross margin back to 26.1% in FY2024,” he projected.

For FY2023, the group posted a net profit of RM49.9 million, down 36% from RM78.5 million the previous year.

The squeeze was attributed to higher labour costs, input cost of raw materials and electricity cost.

Prem expects margins to bottom out at 19% in Q1 FY2024.

Nonetheless, he said the company’s long-term outlook looks resilient, estimating that Farm Fresh will deliver a 30% compound annual growth rate (CAGR) for FY2023-26.

Passing on the price increase would not be difficult either, thanks to the group’s substantial following among the “more affluent” customer segment.

“Farm Fresh’s push into the Philippine market in Q4 2023 should provide an added boost to volumes, but the key to success there will be minimising risks and start-up costs,” he added.

CGS-CIMB maintained a “hold” call on Farm Fresh, with a lower target price of RM1.37 (from RM1.60 previously).

At market close, Farm Fresh’s share price was down 1.54% to RM1.28, giving it a market capitalisation of RM2.4 billion.