WITH about 10,000 dairy cows and bulls in its farms, Farm Fresh Bhd has been battling a margin squeeze as input costs, especially for cow feed, shot up.

       The largest integrated dairy producer in the country is also impacted by the weaker ringgit, as purchases of milk ingredients from Australia turned more expensive.

       In the financial year ended March 31, 2022 (FY22), the profit before tax (PBT) from its Malaysian operation fell by over 16% year-on-year.

       This happened due to the cost increases for raw materials, direct labour and overheads as well as animal feed and herd health cost.

       Initial public offering (IPO) related fees also weighed on its bottom line.

       As a result, the PBT margin from its Malaysian operation slipped to 16.2% compared with 20% in the previous year.

       It is worth noting that the operation contributed over 90% of Farm Fresh’s revenue in FY22.

       To maintain its margin, the dairy producer hiked its product prices twice in 2021, notably in September for chilled products and in December for ambient products.

       Farm Fresh product

       This year, Farm Fresh will again raise prices for chilled ready-to-drink (RTD) products in mid-July for Malaysia and in August for Singapore.

       The group is also optimising its input costs by adjusting the components of the total mixed ration for its dairy cows.

       For example, Farm Fresh is increasing the use of spent grain from other industries, thereby reducing its purchases of corn grain.

       Managing director and group chief executive officer Loi Tuan Ee says that feed and input costs have increased significantly in the aftermath of the Russia-Ukraine war.

       About 10% of Farm Fresh’s operating costs is contributed by animal feed, another 30% from labour and overhead costs.

       The bulk of the operating costs or 60% are direct product costs, which include product ingredients such as milk ingredients, and packaging material.

       “This sustained increase in cost has led to the margin squeeze, and forced our hand to increase prices, and we can only hope that the cost pressures will abate soon rather than escalate further,” he tells StarBizWeek.

       Loi points out that Farm Fresh has not increased its prices for four years, prior to the hike in September 2021.

       He also says that the group’s price increases were moderate – averaging 5% – and that it would help Farm Fresh maintain its margins.

       However, Farm Fresh declined to mention the profit margin level for each product segment.

       “Our pricing is still lower than most competitors, especially within the chilled segment. Our major competitors have had multiple price increases and with a higher quantum of increase, so you can see that we do not raise prices unscrupulously, rather it is very measured and bearing in mind the impact to our customers,” he adds.

       With regard to the impact from the weakening ringgit, Loi says the group has been managing the impact by hedging its Australian dollar exposure with forward contracts.

       Amid the challenges, Farm Fresh is confident that the strategic plans it is putting in place would drive growth, moving forward.

       These include the impending launch of the growing-up milk based on a fortified fresh milk formula, which will compete with both powder-based children milk and RTD reconstituted milk-based products.

       The new product will not contain any sugar or maltodextrin, which according to Farm Fresh, is used in other growing-up milk powder products and has a much higher glycemic index than sugar.

       UOB Kay Hian Malaysia Research on May 25 said that the growing-up milk for children aged three to 12 years would help Farm Fresh enter into a “yet-to-be-tapped and sizeable” market.

       “This would take aim at the currently untapped RM2.3bil powdered milk segment (existing presence in RTD milk segment is valued at RM2.1bil).

       “We believe that should Farm Fresh be able to make a headway into key export markets and sustain its margins amid spiralling costs, it could re-rate to command premium valuations closer to those of consumer darlings such as Nestle (M) Bhd (51.6 times) and QL Resources Bhd (48.8 times),” it said in a note.

       Including the growing-up milk, Farm Fresh says it will launch seven new products between May and July this year.

       Looking ahead, Farm Fresh’s growth will be accelerated once its Taiping farm and processing plant is completed.

       Loi explains that the Taiping facility will focus on supplying products to the other northern states in Malaysia.

       This will free up the capacity of the group’s southern plant in Larkin, Johor to export more milk to Singapore.

       Farm Fresh will be launching its plant-based milk for the hotels, restaurants and cafes segment, to drive further growth.

       “Recently, we were awarded the school milk project. Other than the milk to be provided to the schools, it will importantly give our home dealer network access to school canteens and parent-teacher associations,” says Loi.

       On the group’s export market expansion, Loi notes that Farm Fresh’s subsidiary in Hong Kong is expected to commence business in the fourth quarter of 2022.

       As for Indonesia, the dairy producer is in the final process of securing regulatory approval. Notably, it has obtained the approval from the US Food and Drug Administration for its products.

       “We plan to set up our processing facilities, import our milk ingredients from Kyabram, Australia and focus on the chilled market in the greater Jakarta area. In the Philippines, we see huge opportunities as there is not much fresh milk available. We believe we can set up our processing facilities, import our milk ingredients from our Kyabram facility and focus on the chilled market there in the metro Manila region,” says Loi.

       Currently, Farm Fresh has a total production capacity of 137 million litres per annum.

       The group intends to increase the capacity to 201.1 million litres per annum.

       Loi says that there are no plans for any merger and acquisition activities “at this point in time”.

       “However, we are always on the lookout for any opportunities that will generate long term value to our shareholders,” he adds.

       Khazanah Nasional-backed Farm Fresh, which made a debut on the Main Market on March 22, has risen by almost 23% from its IPO price of RM1.35 to RM1.66 as of yesterday.