Malindo Feedmill Indonesia (MAIN IJ)

Expect robust feed margin to support FY24 earnings

We expect MAIN to deliver another strong earnings growth in FY24F on prospect of sustained strength of its feed business. We raise our FY24/25F EBITDA and net profit by 16/3% and 43/11%, and our EV/EBITDA-based TP to Rp850 (from Rp550 prev.), and maintain our Buy rating on the stock.

Short-term headwinds in 4Q23 for the commercial farming business. Despite the seasonally strong livebird prices near year-end, we expect the recently weak LB prices during Oct-Nov23 may potentially drag commercial farming business margins down in 4Q23 (qoq). As such, we expect the seasonally high 4Q net profit to reverse in FY23 (our 4Q23 forecast at -54% qoq). However, we see room for margins improvement in FY24F for the business from our expectation of lower feed raw material costs.

Strong earnings driven by the feed business. MAIN’s overall gross OPM rose to 7.3% in 3Q23 (2Q23/3Q22: 2.8/1.7%), the highest since the Covid-19 pandemic as the company reported higher margins in its two primary businesses, feed and DOC, which more than offset losses in the broiler segment. Driven by higher revenues (+32% yoy, +12% qoq) and c. 300bps margins improvement to 9.1% in 3Q23 (2Q23/3Q22: 6.1/6.7%), the feed business recorded OP of Rp221bn (+79% yoy, +66% qoq). The feed margin improvement was driven by better cost efficiency which we expect will continue going forward as the company could maintain its feed formulation.

We raise FY23/FY24F estimates on better margins outlook. We raise our FY23F forecast of core net losses (-R97bn) to Rp149bn of core net profit as we expect the feed margin improvement to persist in 4Q23. This results in an uplift in our FY24F EBITDA and core net profit estimates by 16% and 84% respectively. We forecast local corn and soybean meal (SBM) prices to moderate in FY24F (from high base in FY23F), which we expect to support integrator margins (as corn and SBM constitute c. 75% of the feed costs). Our FY24F corn and SBM price assumptions are IDR5.0k/kg (-6.1% yoy) and US$433/t (-4.8% yoy), respectively.

Maintain BUY with a higher TP of Rp850. We roll forward our valuation to FY24F and keep our target valuation multiple at 7.4x EV/EBITDA (-1SD of its five-year average) which result in our higher TP to Rp850 (from Rp550 prev.). Key risk is a supply disruption which can led to higher feed raw material costs.

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