Falling grain price augurs well for Malayan Flour Mills

by **Cals** Thu 07 Aug 2014, 00:49

Business & Markets 2014

Written by Jonathan Gan of theedgemalaysia.com

Wednesday, 06 August 2014 09:32

KUALA LUMPUR: Malayan Flour Mill Bhd share price has staged a strong rebound since last month thanks to the falling prices of grains prices that would augur well for the miller’s earnings as a result of lower input costs.

The hardly-traded counter marched to a five-year high of RM2.18 yesterday from RM1.60 in early July, up 32%.

Maybank Investment Bank Research analyst Lee Yen Ling commented that the company would be a beneficiary of falling grain prices.

“Grain prices have been on a free fall since May 2014 and the supply outlook is pointing toward sustainably low prices. With wheat making up 80% to 90% of its flour production cost and corn/soybean making up the bulk of its poultry cost, we expect margin expansion to boost its earnings,” she said.

Lee projects a compounded annual growth rate (CAGR) of 20% on the company’s net profit. “We project a two-year net profit CAGR of 20% on a two-year revenue CAGR of 5% and margin improvement of 1.8 percentage points in FY14 to FY15 (from FY13).

She pegs a target price of RM2.70 for Malayan Flour based on 15 times FY15 price earnings ratio (PER). “Trading at 11.4 times FY15 basic earnings per share and 13.6 times on a fully diluted basis, we think the valuation is undemanding, compared to its bigger cap peers,” Lee said.

Lee also noted Malayan Flour’s steady dividend payment. “The stock also offers high net dividend yields of 4.3% to 4.8% at sustained FY13 54% dividend payout ratio,” she said.

Lee said that the outlook for the stock remains positive given its practice of retaining two to three months inventory

“We expect its margin to only expand in 2H14. With wheat accounting for 80% to 90% of its flour production cost, we estimate that every 10% of drop in wheat price will enhance its Flour division’s margin by around 6.7 points and boosting group’s overall bottomline by 70%” said Lee.

Malayan Flour saw its net profit more than double to RM23.1 million, or 4.3 sen per share, to RM10.2 million, or 1.9 sen per share, for the first quarter ended March 31, 2014. Revenue was higher at RM579.3 million against RM521.2 million previously.

The last financial year ended Dec 31, 2013 was a good year. Malayan Flour’s net profit jumped to RM66.9 million from RM28.5 million the year before. Earnings per share expanded to 12.44 sen compared with 6.07 sen. It declared much higher dividend at 12 sen per share compared with three sen in the preceding year.