Farm Fresh Berhad (“Farm Fresh”) (formerly known as The Holstein Milk Company Sdn Bhd) is heading for a listing on Bursa Malaysia’s Main Market. 

Farm Fresh’s initial public offering (IPO) would entail the sale of 743.18 million shares, or 40% of its enlarged issued share capital according to its draft IPO prospectus posted on the Securities Commission website. The 743.18 million shares comprise 222.95 million new shares and 520.23 million existing shares. 

Of the total 743.18 million shares, up to 687.44 million shares will be involved in the institutional offering to Malaysian and foreign institutional investors as well as selected investors. This includes Bumiputera investors approved by the International Trade and Industry Ministry. The remaining 55.74 million shares will be made available for retail investors. 

If you are looking at Farm Fresh with interest, here are 9 things to know before you invest.

1. Business overview

Farm Fresh is a vertically integrated dairy group engaged in the business of farming, manufacturing and distribution of various dairy products and plant-based products.

Its market share in the chilled ready to drink (RTD) milk segment has tripled from 12% in 2015 to 36% in 2020. In the same period, the group more than doubled its market share in the yoghurt segment, from a 5% market share in 2015 to 11% in 2020.

The group entered the ambient RTD milk segment in 2018 and by 2020 has established an 8% market share. Its “grass-to-glass” business model covers all major stages of the dairy production process from farming to the processing of dairy and non-dairy products and distribution. 

Currently, Farm Fresh operates six dairy farms (five in Malaysia and one in Australia) with a herd size of approximately 9,000 dairy cows and bulls and the capacity of housing a maximum number of 9,400 dairy cows. Its dairy farms are located in Malaysia and Australia with an aggregate gross land area of approximately 5,400 acres. 

The group also operates two processing facilities in Malaysia and one in Australia, which house in total 18 production lines. Based on its current production capacity, it is able to produce approximately 137.0 million litres of finished dairy products and 84.0 million litres of processed milk annually.  

With its animal husbandry, dairy farm operations, processing facilities and multi-distribution network, the group is present across the value chain, at each of the upstream, midstream and downstream stages, of an integrated dairy industry as set out below: 

(Source: Draft IPO prospectus)

2.  Product overview and geographical markets 

Farm Fresh offers a variety of products such as dairy products, plant-based products and fruit jam and sauces. Its dairy products comprise chilled RTD milk, ultra-high temperature processing (UHT)/ ambient products, and yoghurt products contributes the bulk of the group’s revenue, representing 86% of sales for the financial year ended (FYE) 31 March 2021.

The following table sets out the breakdown of its revenue by product categories and the percentage these revenues represent as a proportion of its total revenue for the financial years indicated:  


(Source: Draft IPO prospectus)

In the draft IPO prospectus, management has indicated that it intends to stop selling raw milk going forward as well downsize the fruit jam business. 

Malaysia and Australia are Farm Fresh’s largest geographical markets, representing 96% of the group’s revenue for FYE 31 March 2021. The following table sets out the breakdown of the group’s revenue by geographical markets and the percentage these revenues represent as a proportion of its total revenue for the financial years indicated:   

(Source: Draft IPO prospectus)

3. Extensive distribution network 

Farm Fresh operates on a multi-channel distribution model that is structured to facilitate the sales of different products to address different customer markets, and comprises large format retailers, stockists and home dealers, hotel, restaurant and café (HORECA), export markets and convenience stores. 

The table below sets out the breakdown of the group’s revenue by distribution channel in Malaysia and Australia for the financial years indicated:

(Source: Draft IPO prospectus)

Farm Fresh has pioneered an innovative distribution method to sell products through a network of stockists, home dealers and agents under its “home dealers programme”. The home dealers network empowers micro-entrepreneurs (many of whom are women) to make a sustainable income by distributing Farm Fresh products within their communities. 

As at 31 March 2021, the group has 38 stockists, spanning all the states in Malaysia, managing 871 home dealers who in turn manage 1,609 agents of theirs selling its products. According to Frost & Sullivan, Farm Fresh has the largest home dealer network amongst vertically integrated dairy companies in Malaysia.  

Its stockists and home dealers network represents its fastest growing distribution channel, with a revenue compound annual growth rate (CAGR) of 117.7% from FYE 31 March 2019 to FYE 31 March 2021 and contributed 34.5% of the group’s revenue in FYE 31 March 2021. 

4.  Market share

Farm Fresh is among the top three players in both RTD milk and yoghurt categories in Malaysia. Its market share and ranking has increased over the years, and continued to increase compared to other players even in the first half of 2021, when it still recorded sales growth despite the market recoding a slight decline compared to the same period in 2020.

Farm Fresh is estimated to be the second largest player in the RTD milk category and the third largest player in the yoghurt category in Malaysia in the first half of 2021. Within the same period, Farm Fresh is also estimated to be the market leader in Malaysia in the chilled RTD milk segment. 

(Source: Draft IPO prospectus)

5.  Future plans and strategies

Farm Fresh’s future plans and strategies are as follows:

  • Expand its capabilities across the value chain in Malaysia

Farm Fresh endeavors to sustain and enlarge its market position by expanding its upstream capacity while improving operational efficiency and deepening its distribution network. 

  • Continue to develop and grow its product portfolio

The group is well-placed to leverage on the current market recognition of its brands, its strength in product development, distribution network and product quality to enhance its product offering.

  • Continue to develop and grow its product portfolio

The group plans to increase its production capabilities in Australia through the expansion of its Kyabram Facilities to further support to tis operations in Malaysia and Singapore as well as serve an export hub to expand into the adjacent markets in the Southeast Asia and Asia Pacific regions. 

6. Use of proceeds 

Farm Fresh expects to use the gross proceeds from its public issue in the following manner:

  • 46.5% of gross proceeds to establish a new manufacturing hub, a new dairy farm and integrated processing facility in Malaysia;
  • 19.9% of gross proceeds to expand its production facility in Australia; 
  • 13.3% of gross proceeds for regional expansion outside of Malaysia;
  • 13.6% of gross proceeds for the purpose of working capital; and
  • 6.7% of gross proceeds for estimated listing expenses. 

7. Dividend policy 

Farm Fresh has not declared or paid dividends to its shareholders for the past three financial years. It targets a payout ratio of approximately 25% of net profits of each fiscal year after taking into account working capital and maintenance capital requirements.  

8. Substantial shareholders and key management

The following table sets out the direct and indirect shareholdings of the group’s substantial shareholders before and after the IPO:

(Source: Draft IPO prospectus)

Post IPO, the largest shareholders of Farm Fresh are the Loi Family and Khazanah Nasional Berhad, the Malaysian government’s investment arm.

Below is a brief description of the group’s key management:

  • Loi Tuan Ee – He is the Group Managing Director, Group Chief Executive Officer and one the of the co-founders of the group. He has over 15 years of experience in the dairy industry. As Group Managing Director, he is primarily responsible for the business development and direction, strategic corporate planning and the overall operations and management of the group.

    Under Loi Tuan Ee’s leadership, the group was rewarded “Best Dairy Farm” by Asia Livestock in 2015 and in 2020, the group received the ASEAN Inclusive Business Award. In this personal capacity, his notable achievements include being selected as an “Endeavour Entrepreneur” at the 65th Endeavour International Selection Panel in Bali in July 2016 as well as being nominated for Ernst & Young’s Malaysia Entrepreneur of the Year in 2016. 
  • Loi Foon Kion – She is the group’s Non-Independent Non-Executive Director and Substantial Shareholder. She graduated with a Bachelor of Science (First Class Honours) in Food Science and Nutrition from Universiti Kebangsaan Malaysia in 1991. She also holds a Certified Diploma in Accounting and Finance from The Chartered Association of Certified Accountants since 1996. She is the sister to Loi Tuan Ee and Loi Tuan Kin.
  • Loi Tuan Kin – He is the group’s Plant Operations Director and one of the co-founders. He has over 12 years’ experience in the dairy industry. In 2010, he co-founded The Holstein Milk Company Sdn Bhd together with Loi Tuan Ee and was instrumental in establishing its Mawai Farm in that same year. He currently oversees and manages all operational matters at both the Mawai Farm and Larkin Facility, which includes, amongst others, dairy milk transfers from farm to factory, the processing of raw materials to finished goods, and the logistics coordination and distribution of products within Malaysia and Singapore. 
  • Azmi Bin Zainal – He is the Group Chief Operating Officer and is responsible for managing the operations and sales. He is also actively involved in the distribution and marketing of the group’s products.

9. Financial Highlights  

Audited FYE 31 March 2019 2020 2021
  RM’000 RM’000 RM’000
Revenue  178,227 303,067 490,498
Cost of sales (123,833) (223,013) (349,612)
Gross profit  54,394 80,054 140,886
       
Profit before tax 28,181 36,176 67,589
       
Profit after tax attributable to:      
Owners of the company 27,436 35,220 36,228
Non-controlling interest (59) (838) (3,400)
       
Total equity 163,811 197,765 241,030
Total loans borrowings (including lease liabilities) 64,477 153,714 248,957
Net debt 60,990 146,235 237,233
       
Net cash from operating activities 13,657 24,173 59,668
Net cash used in investing activities (48,823) (91.967) (85,651)
Net cash from/ (used in) financing activities 40,741 64,813 24,483
       
% change in revenue 70.0 61.8
Gross profit margin (%) 30.5 26.4 28.7
Profit before tax margin (%) 15.8 11.9 13.8
Profit after tax margin (%) 15.4 11.3 6.7
Gearing ratio (times) 0.39 0.78 1.03
Net gearing ratio (times)  0.37 0.74 0.98

(Source: Draft IPO prospectus)

Farm Fresh is a high growth company, its revenue has jumped by 70.0% and 61.8% year-on-year in 2020 and 2021, but profits have only increased by 28.4% and 2.9% year-on-year over the same period.  

That said, much of its growth was fuelled by external financing since its net gearing ratio has more than doubled from 0.37 times in 2019 to 0.98 times in 2021. It is perhaps timely for the group to seek a public listing to raise funds to fund its next phase of growth. 

While Farm Fresh has not revealed the amount of capital it is seeking to raise, local financial media has indicated that the group is seeking an IPO valuation of RM2.0 billion. This would value the group at trailing price to earnings (PE) ratio of roughly 55 times. The valuation is certainly steep but may be justified if the group is able to execute on its future expansion plans and growth strategies.  

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