PUBLIC Invest Research believes end-to-end animal health solution provider Rhone Ma Holdings Bhd’s plan to grow its dairy farming business will translate to higher earnings growth in the long term.
The research house said this in a company update yesterday (Sept 27) after a recent visit to Rhone Ma’s six-acre dairy and livestock farming facility in Batang Kali, Selangor, which currently houses 300 cattle, including Holstein A2A2 cows from Australia.
Following its investment in Nor Livestock Farm in February 2020, Rhone Ma, which manufactures, trades, markets and distributes animal health products, diversified into dairy farming.
The group is now seeking to expand its dairy business with a potential land acquisition of more than 100 acres, aiming to increase its herd size from 300 cattle to more than 1,000.
“As the Malaysian Government works towards increasing the country’s self-sufficiency level in fresh milk production from 62% to 100% by 2025, we believe Rhone Ma’s plan to grow its dairy farming business should translate to higher earnings growth beyond its financial year of 2025 estimates (FY25F),” the research house said.
It also maintained its outperform call on Rhone Ma at an unchanged target price of RM0.88.
Milk processing business to fit in the missing piece
Public Invest Research, which is parked under Public Investment Bank, noted that Rhone Ma does not currently process milk that is being produced at its Batang Kali facility but is sold to wholesalers due to the absence of a milk processing plant.
However, it said by the first quarter of its financial year of 2023 (1QFY23), the group would be able to sell processed milk to consumers with the commissioning of its milk processing plant in Kapar, Selangor.
It explained that the raw milk produced from Rhone Ma’s Batang Kali facility is predominantly the higher quality A2 milk that helps to prevent symptoms of lactose intolerance.
“The group decided to switch away from cross-breed to importing pure-breed Holstein cows (that are able to produce A2 milk) due to higher milk yield of an additional 50%.”
New land acquisition to further expand dairy business
To further grow its dairy business, the group is seeking to acquire another piece of land (more than 100 acres) to expand its herd size.
The herd size is expected to reach 500 cattle by the end of the financial year of 2023 (FY23F) from the current 300 cattle.
Coupled with the new land acquisition, the group aims to reach more than 1,000 cattle.
“However, we note that (while) earnings contribution from dairy business remains muted for now, given the gestation period and lack of economies of scale, we believe that the dairy business will start to contribute meaningfully to the group from FY25F onwards,” said Public Invest Research.
Near-term earnings outlook
In Rhone Ma’s recent financial year of 2022 second quarter (2QFY22) results, earnings increased 1.3% quarter-on-quarter (qoq) but dropped 12.6% qoq due to rising production costs which compressed the EBIT margin to 10.5% from 11.4%.
Nevertheless, the result in the first half of the financial year of 2022 (1HFY22) was in line with the research house’s expectations.
It added that end-to-end animal health solutions will remain the largest contributor for Rhone Ma over the next 2-3 years, accounting for 80% of the group’s revenue.
“With a growing pet population in Malaysia as well as owners’ greater willingness to spend on pets’ well-being, we believe demand for animal health solutions will continue to grow.
“Meanwhile, Rhone Ma’s milk processing business could be the next key growth area in the longer run,” it noted.
However, Public Invest Research said it does not expect any material contribution in the near term for the group as it should take time for them to penetrate and gain a higher market share in the competitive dairy farming industry.
“Having said that, we believe the group will succeed given its experience in animal health and food ingredient supply that should complement its new A2 milk farming and distribution business.” – Sept 28, 2022
Main photo credit: The Edge Markets
