PETALING JAYA: RHB Research has downgraded its call on Farm Fresh Bhd from “buy” to “neutral” after the group’s share price reached an all-time low yesterday.
Its share price dropped 29.6% to RM1.14 at yesterday’s close from RM1.62 on Jan 3.
“With the latest setback, we turn more conservative with our valuation, taking into account the weaknesses in earnings visibility and consistency.
“That said, we see minimal earnings downside risks moving forward, and the heavy selldown may have largely priced in the weakness,” it said in a research note today.
Meanwhile, RHB Research has downgraded Farm Fresh’s target price (TP) to RM1.23 from RM1.72 previously on May 31.
“We slash our discounted cash flow-derived TP to RM1.23, which now implies a lower 28x price-earnings ratio for the 2024 financial year (from 35x),” it added.
The research firm estimates that Farm Fresh’s future earnings will be negatively affected as farmgate milk prices for the July 2023-June 2024 period dropped only slightly compared to previous expectations.
“As opposed to an expected 14% year-on-year (y-o-y) drop in farmgate milk prices, the prices for the new season inched down by a mere 1% y-o-y, or 4% versus the prices Farm Fresh paid in the first half of 2023.
“This prompted us to cut our FY2023-2025F earnings by 11%-13%, as our previous margin assumption was rendered too aggressive,” noted RHB Research.
In a local bourse filing yesterday, Farm Fresh made a voluntary statement to Bursa Malaysia to clarify the unusual and drastic decline in its share price since May 30.
According to the company, the sharp drop in stock price was due to circulated rumours which were triggered by Australia’s Bega Group’s announcement of a decline in Australian milk production.
The decline, said Farm Fresh, will result in “intense competition for raw milk, leading to Bega Group expecting a decline in performance and an expected non-cash impairment in the range of A$180 million (RM535.85 million) to A$280 million (RM833.54 million) in its audited results (subject to finalisation)”.
Despite the lower-than-expected decrease in farmgate milk prices, Farm Fresh stated in the filing that it would be “much less impacted” compared to Bega Group.
This is on account of the group purchasing approximately only 14% of its total milk ingredients from third party farmers in Australia in the financial year ended March 31, 2024.
“Additionally, 70% of the raw milk used by us comes from our own farms in both Malaysia and Australia,” it clarified.
As at 10.28am, Farm Fresh’s stock price was down 3 sen or 2.6% at RM1.11, giving it a market capitalisation of RM2.06 billion.