Malayan Flour Mill – a turnaround potential

[i4value]

Bursa Malayan Flour Mill returns over the past 12 years showed a declining trend. The company also falls into the Turnaround quadrant in the Fundamental Mapper.



You could be forgiven in thinking that this is not a company to consider. But a detailed fundamental analysis showed that it can be considered fundamentally sound given its solid foundation and a strong market presence.

While there are profitability and operational efficiency challenges, it has demonstrated the ability to generate consistent positive cash flows, indicating underlying business stability.

The current market price is significantly below its estimated intrinsic value. This offers potential for investors who believe in Malayan Flour Mill capacity to enhance operational and capital efficiencies.

[weijian]

hi i4value,

I believe MFM only generates consistent positive cashflow due to its high depreciation/amortization of its PPE required to generate the revenue. This ties back to the CAPEX, which is higher than the OCF as you had summarized. I would also assume that working capital (especially the inventory required for the poultry business) is also larger proportionally as it scales, but it is probably masked out by the JV accounting (equity stake).

You had mentioned MFM has "turnaround potential" but I did not read of any (potential) catalyst in your article. Is undervaluation a potential catalyst? Probably not but sometimes yes and it is up for debate how much upside the catalyst will bring. You calculated the ROIC to be in the 3-4% range - If everything remains unchanged (business economics, the capital allocation model/requirement etc), then that is what the return will be. If it takes 10years for some catalyst, eg. a MBO that offers ~30% above last market price, then that adds ~2.5% to the 3-4% return for 5.5%-6.5% returns. That is slightly better but it is a big IF.

It might actually be wiser to put in some money into the Msian Gov's EPF with guaranteed chop over MFM, is what I conclude from reading your well written article.

[i4value]

Post 2020, there are signs of improving capital efficiency. This means bigger bang for what is spent. Historically there have been topline and profit growth. But return trends have not following the same direction as there was higher capital growth. I expect this to change with improving capital efficiency.

Its biggest challenge has been it unsustainable Reinvestment rate (Reinvestment/NOPAT). Part of this was due to the low NOPAT. I expect better NOPAT and lower Reinvestment to drive down the Reinvestment rate. From a valuation perspective, this will led to bigger free cash flow and hence better valuation.

From this perspective, the better prospects is not really tied to some catalyst.