In its Q4 FY2023, Farm Fresh’s net profit plunged 72.34% to RM4.89 million from RM17.68 million in Q4 FY2022. However, for the first quarter ended June 30, 2023 (Q1 FY2024), Farm Fresh posted a net profit of RM6.37 million, a 30.26% increase compared to Q4 FY2023.

The research house is forecasting a robust growth in earnings as Farm Fresh had raised its selling prices in July while costs have declined.

It noted that during the CGS-CIMB consumer conference 2023 on Sept 6, Farm Fresh group chief financial officer Khairul Mat Hassan said farmgate prices of raw milk in Australia slipped 4%, while whole milk prices fell 24% year-on-year, in August.

In a note today, CGS-CIMB expects the full impact of the falling prices to reflect in Farm Fresh’s books in the coming quarters, and anticipates a rebound in the company’s net profit to the tune of over RM100 million annually post FY2024.

“We estimate Farm Fresh’s gross margins to rebound in the coming quarters, helped by lower costs as well as the average 5% price increase effective from July 1, with a 26% gross margin for FY2024 versus Q1 FY2024’s 17.7%,” it said.

CGS-CIMB maintained its “hold” recommendation, with an unchanged target price (TP) of RM1.37.

“At RM1.37, Farm Fresh would be trading at 22 times calendar year 2024 price-earnings (P/E), which is comparable to -0.5 standard deviation of peer Fraser & Neave Holdings Bhd’s 15-year mean P/E.

“A return to recurring ROEs (returns on equity) of 20% similar to FY2022’s would take our fair valuation to RM1.87, while only delivering a 12.5% ROE would result in a fair valuation of 93 sen,” it added.

Furthermore, Farm Fresh’s earnings in the coming quarters will be crucial in determining the company’s medium-term earnings, ROEs and therefore its share price.

However, failure to meet investor expectations of a margin recovery would be a key downside risk while surpassing those expectations will drive a rerating, hence an upside risk, CGS-CIMB said.

In June, CGS-CIMB projected a three-year core net profit compound annual growth rate (CAGR) of 22.6% for the fresh milk producer based on its capacity expansion plans across its integrated supply chain.

The research firm said this will allow the company to cater for higher demand from its current operating markets as well as new market pursuits including Hong Kong, Indonesia and the Philippines.

At 3.52pm, Farm Fresh’s share price was down one sen or 0.81% at RM1.23 giving it a market capitalisation of RM2.3 billion.