Posted Date: April 16, 2021

MARC has assigned a preliminary rating of AA-IS with a stable outlook to The Holstein Milk Company Sdn Bhd's (THMC) proposed RM1.0 billion Sukuk Wakalah Programme. THMC is an integrated dairy farming player with operations ranging from cattle breeding and milk processing in Malaysia and Australia, to distribution of dairy products.

The assigned rating is driven by THMC's growing market share in the dairy industry and its improving profitability, characterised by strong operating profit margins and a moderate leverage position. These strengths are counterbalanced by risks associated with a rapid business expansion phase and biological assets.

THMC has sizeable farm acreage comprising 1,510 acres domestically and 2,555 acres in Victoria, Australia; it housed a total of 5,887 head of cattle in its four Malaysian farms and 2,618 in Victoria as at end-December 2020. The recent addition of 500 acres to its existing farm in Muadzam Shah as well as a soon-to-be-completed 828-acre farm and processing plant in Taiping will further strengthen THMC's market position.

MARC notes that the cattle breed in the Malaysian farms is of the hardy mix-breed Australian Friesian Sahiwal (AFS) type that has stronger resilience to tropical conditions and diseases, and provides relatively higher milk yield than local breeds. In Victoria, THMC rears the Holstein breed which has significantly higher milk yielding ability. Its total milk output from its farms stood at 24 million litres during financial year ended March 2020 (FY2020), with its Australian farm accounting for twice the collective output of its Malaysian farms due to higher milk yields.

THMC has a healthy domestic market share of 15.6% in milk products and is the second-largest dairy player in the country in January 2021. It has a dominant 36% market share in the fast-growing and premium chilled fresh milk segment as at end-2020. In the ambient milk segment, the company has also doubled its market share to 8% in 2020 within two years of entry. The group has used innovative multi-channel distribution networks, particularly its home dealers network, to accelerate market penetration. The network, which generates about 35% of total revenue as at end-2020, has reduced THMC's advertising and marketing costs while providing a platform for micro-entrepreneurs to market its dairy products.

MARC notes that THMC has a good track record in managing its transport logistics; raw milk produced from its farm in Muadzam Shah is processed directly on site while raw milk from the rest of the farms is transferred by refrigerated tank trucks to its Larkin plant for processing. THMC currently has 17 production lines for downstream processing, producing chilled fresh milk, UHT fresh milk, yoghurt and plant-based products. Its milk production growth which includes purchased milk has been strong with output increasing to 70.6 million litres in FY2021 from 46.2 million litres in FY2020. A majority of its purchased raw milk in Australia is processed in-house at its new plant in Kyabram, before being shipped (in liquid or frozen state) to Malaysia. THMC has maintained supply stability through purchases from third parties; it has a large pool of dairy farmers that mitigates supply disruptions.

In terms of financial performance, revenue grew sharply to RM303.1 million in FY2020 from RM54.9 million in FY2016, chiefly driven by sales of chilled fresh milk and UHT milk, accounting for 56% and 28% of revenue for FY2020. This is in line with the increase in its production capacity and the demand for its products. Operating profit margin has remained healthy, ranging between 14% and 19% over the period. Total borrowings stood at a moderate RM148.7 million but is expected to grow to fund its additional farms and processing facilities as well as to grow its herd size. Its capex, estimated at RM400 million over the next four years, could also be supported by a potential equity fundraising. This would strengthen the balance sheet debt-to-equity ratio, projected to decline to below 0.40x from 0.73x.

Gan Peishi, +603-2717 2948/ peishi@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my.

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