Monday, 11 October 2021

Rhonema: Milk Not Enough


Rhonema was listed on the main market of Bursa in December 2016 at an issue price of 75sen.

It is mainly involved in manufacturing and distribution of animal health products to livestock industry, as well as distribution and supply of food ingredients to food manufacturers.

The animal health products include pharmaceuticals, vaccines, feed & feed additives etc, are mainly for the poultry & swine segment. 

In early 2020, the company expanded into the ruminant segment (cow) by acquiring 49% stake in 3 companies.

This acquisition includes a small dairy farming business which produces fresh milk which is sold to wholesalers.

Rhonema mentioned that it has a plan to grow this dairy farming business and did not rule out venturing downstream to have its own brand of fresh milk products in the future.

That's one of the main reasons I decided to invest in Rhonema.

Rhonema aims to import and breed purebred Holstein A2A2 cows, which produce fresh A2 milk.

The two most common type of proteins in cow milk are A1 and A2. There are claims that A1 protein might trigger stomach discomfort similar to lactose intolerance.

A1 protein is even linked to diabetes, heart disease, sudden infant death syndrome and autism etc. However, those links are not confirmed.

A2 milk is marketed as a healthier choice without such troublesome issues.

It's reported that Rhonema is the first producer offering fresh A2 milk in Peninsular Malaysia.

Its has a 6-acre farm located in Batang Kali. From recent NST report in Sep21, currently it has 250 cows and plans to increase it to 350 by the end of this year.

It produces average 55,000 liters fresh milk per month at the moment, and might reach 150,000 liters per month by year end.

It expects to have 500 cows within 2 years.

Last month Rhonema, via its indirect 49%-owned A2 Fresh Sdn Bhd, announced a joint venture with Kulim Berhad to "develop, operate and manage a potential dairy project".

Kulim is a well-known plantation giant which was taken private and delisted from main board in 2016. It's a subsidiary of Johor Corporation.

Johor Corp owns famous brands such as KPJ, KFC, Pizza Hut, Ayamas, Life etc.

Establishing dairy farms and processing plants requires huge investment of few hundred millions ringgit. No doubt Kulim will be the main source of funding.

In this JV, Kulim owns 65% shares, while A2 Fresh S/B holds 35% shares. Since A2 Fresh S/B is 49% owned, Rhonema will have just 17.15% share in this dairy project.

This is a bit low for me, a 25-30% shares would be great.

The initial investment requirement of the dairy project is estimated to be approximately RM41mil. Thus it will be RM7mil for Rhonema.

It has an aim to produce up to 11 million liters of fresh milk a year.

Malaysia plans to achieve 100% fresh milk self-sufficiency by 2025. However, increasing fresh milk consumption by Malaysians has widened the deficit from 13.3 mil liters in 2014 to 26.1 mil liters in 2020.

From statistics, Malaysia's annual fresh milk production increases from 27.02 mil liters in 2012 to 36.61 mil liters in 2017. It reaches 40.6 mil liters in 2019 but it still falls short of 68.8 mil liters consumed in 2019.

This deficit of fresh milk has to be imported.

Thus, there are a few listed companies seeing this as an opportunity.

F&N kickstarted its venture into dairy farming business in the end of year 2019 by proposing to acquire a huge tract of land at Chuping from MSM to turn it into its dairy farm.

However, the deal was later cancelled as relevant approval was not obtained. It's indeed a setback to F&N's ambition to diversify into dairy farming in Malaysia.

FGV has successfully started its dairy farm project since Mac 2020, which includes both dairy farming and fresh milk processing business.

It has already come out with its own fresh milk brand known as "Bright Cow".

According to news report, FGV has a total of 258 dairy herd size in its Linggi farm in the end of year 2020. This is almost similar to Rhonema's herd count of 250 now.

Farm Fresh, backed by Khazanah Nasional, should be the largest fresh milk producer in Malaysia. 

Its revenue grows a whopping 175% in the last 2 years from RM178mil to RM490mil, while the PATAMI grows just 32% from RM27.4mil to RM36.2mil.

Farm Fresh has 3,009 milking cows in Malaysia and Australia. It's not too bad if Rhonema achieve its target of 350 cows by year end.

If Rhonema milk production really can reach 150,000 liter per month this year, this is 1.8 million liters per year compared to Farm Fresh's farms in Malaysia with 8.9 million liters per year.

Farm Fresh's revenue from sales of raw milk alone is not spectacular at RM23.7mil compared to sales of dairy products at RM423.8mil.

So it's good for Rhonema and its partner to have their own brand. 

Of course it's not a simple task to penetrate the market and gain a significant market share. Farm Fresh started in 2010 and takes 10 years to reach current state.

Currently Farm Fresh has 18% market share in Malaysia for Ready-To-Drink milk. Dutch Lady is still the big brother in this segment but its market share has been eroded.

RTD milk market is highly competitive. Rhonema and its partners seem to concentrate on A2 fresh milk which might differentiate them slightly from others.

Surely this investment will incur loss in the initial stage. Whether it can grow to gain significant market share will depend very much on the capability of the management team.

Is Kulim Berhad the right partner to get the job done? It's still too early to comment.

Anyway, Farm Fresh will be listed in the stock market soon. I've never subscribed to any IPO before but I think Farm Fresh might be my first.


  1. Hi,

    Thanks for the write up, very informative.

    I'm not sure whether my calculations are correct.

    Farm Fresh
    3000 cows, sales RM23.7mil, profit margin?

    If 500 cows, sales estimated RM3.8m Not sure on the profit.
    With 49% stake, lower.

    On the JV with Kulim
    Farm Fresh 22m litres, sales RM23.7m
    JV 11m litres, estimate sales RM12m
    17.5% ultimate stake, only RM2.1m sales

    These figures can only be achieved at least more than two years later. But seem small compared with their current financial and market cap.

    Not sure I'm getting the wrong calculation or not.

    1. Hi, this calculation gives us a very rough guide about the sales and profit but it might not be accurate as Farm Fresh has significant milk production from Australia.

      I think Rhonema mentioned before that it sells fresh milk to wholesalers at RM3 to RM4 per liter. So if 11mil liters per year, it will be around RM33mil to RM44mil sales per year.

      I wonder why Farm Fresh only generated RM23.7mil from 22.7mil liters raw milk in its FY2021, may be it sells cheaply to its own milk processing plants?

      From Rhonema's latest FY21Q2 quarter, revenue from dairy farming is RM3.785mil and PBT RM0.227mil in the first 6 months of 2021. If we assume its raw milk output is 55,000L/mth in that period of time,

      Annualized revenue = RM7.57mil
      Annualized milk output = 0.66mil litres

      This is RM11.50 per liter, which is unlikely to be purely from sales of fresh milk. If it is, then 11mil litres a year can give RM126mil sales!!

      The most important move is to have its own brand of RTD milk, which can generate much higher sales and profit margin as shown by Farm Fresh. Only if it's successful :)

    2. I think the sale is RM1m, the price per litre about rm6, assuming 55k litre a month

      revenue from dairy farming which is segmented under others, of approximately RM0.99 million contributed by another newly acquired subsidiary, NLF.

    3. According to industry sources, farms in Klang Valley generally sell fresh milk to wholesalers at RM3 to RM4 per litre, while notable brands of milk in retail stores are sold at about RM6 to RM7 per litre.

    4. May be the revenue and profit from "others" segment include other things like gain in biological assets etc, and not entirely from sales of fresh milk.

  2. But rm126m, their stake is only 17.5%, about rm22mil sales only. I like this stock, but figures seem small. Will check again, thanks.

    1. Ya, Rhonema's stake in small, that's why my title "Milk Not Enough", haha. Anyway, a few millions of profit is significant to company of such size.

  3. Hi Sir,

    I do keep Rhonema shares too! I bought it because of its successful commissioning of new Nilai Plant which has a capacity of 4x bigger than its old plant. The new plant started operation in February 2021. There is no funding risk & execution risk (its new plant already completed and now in operation).

    Yenher, a newly listed company, is a competitor to Rhonema in animal health products. Yenher is planning to build new factory slated for completion in 2023-2024. This means there is a demand for animal health products or Yenher would not be building new plant.

    Rhonema can immediately gear up production in its new plant when demands pick up. I expect Rhonema to register profit growth in the next 1-2 years.

    @bursadummy, would you consider plantation stocks? I like MKH very much because of its Grade-A rated management. By measure of MKH's FFB is 30tonne per ha. No other plantation companies can come near to MKH's remarkable feat. Over 90% of MKH's plantation estate in the Kalimantan is at its prime age. Given the ASP is over Rm5k per tonne, MKH can easily double or tripple its profits in next few quarters.

    The plantation estate MKH bought was in 2008. This MKH's estate is just 72km away from new capital of indonesia in the kalimantan. MKH will sure capitalise on this for other commercial activities that include building houses, etc.

    1. I also expect Rhonema to grow its sales and profit slowly. As for MKH, I haven't study it for many years. I always think that it's a solid company. I'll take a look at it. Thanks.