This is Malaysia’s First Publicly Listed Vegetable & Fruits Wholesale Company

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Who is This Company?

Farm Fres- Ahem, I mean Farm Price is the company behind this. It distributes and sells vegetables, fruits and other food products to Malaysia and other countries in the region. It was recently listed in the market and remains the only such company in the industry that you can invest in.

In English, Farm Price is the company that brings vegetable and fruit produce to the uncles and aunties at the pasar (market). They will go to the farm, pile them on top of their trucks and travel all the way to the city. Or they will arrange for them to come from overseas.

FP’s Reception was Quite Good

FP was listed for RM0.24 per share. On the first day of trading, it rose to RM0.41 at the end of the day, almost doubling in value. As of 16 May 2024, it remained at about the same level of RM0.415.

On 3 May 2024, news came out that FP’s shares were oversubscribed by 92 times. What does that mean? It means FP wanted to list shares that are worth about RM24.5 million in the market, but about RM499 million worth of funds were coming from investors. This does not mean FP will get RM499 million. It just means investors are keying in these trades to try to get RM24.5 million worth of shares. First come, first serve, right?

So, Why is FP Trying to Get RM24.5 million?

This is perhaps the puzzle here. Let’s first address the elephant in the room. FP is using RM10.6 million for working capital, which represents about 43% of its proceeds. Why?

First of, when we look at a company’s IPO, we expect most of the proceeds to go into expanding the company. On that front, I do see this. They are using RM6.4 million to construct new facilities, RM2 million for machinery and equipment, and RM1.6 million for a logistics centre. Their business strategy is to expand more and in the future, to Singapore.

If we stop there, it would have been fine. But this RM10.6 million is weird. FP writes that it needs RM9.6 million to buy ‘inventory’ which are fresh vegetables, F&B products and other groceries. These are ... perishable goods. And they expect to sell them within 6 months. Why is FP using IPO proceeds to pay for something that is considered ‘business-as-usual’?

Is FP Having Cash Issues?

I dug deep into its IPO prospectus. This is weird. First of, I found out that its cash balances have been declining throughout the years. Mind you, FP is a company that has been profitable in the past 4 years, and both its profits and revenue have been increasing. Cash has decreased from RM6.2 million in 2020 to RM3.7 million in 2023.

The cause? It has been paying down its loans and banker’s acceptance (about net RM3.4 million). And they paid back about RM3.4 million back to its directors. From there, FP lost a total of about RM7.9 million in cash in its financing activities.

Apparently, the directors of the company lent a bunch of money to the company to buy inventory in the past... even though the company generates enough cash from its operations to buy inventory. This is weird, and I don’t like it.

Now, I get that they are trying to repay their loans. Any company would want to be debt-free. What I don’t get is why are they paying down their loans but using the proceeds instead to buy inventory? Companies normally just used the proceeds to pay down the loan. Just go direct. This decision is confusing to me.

While I don’t think this is necessarily bad, it’s just ... weird. Why is FP doing this confusing thing? It is profitable, even from a operational cash flow perspective.

Anyway, enough of this. Let’s get to its company revenue drivers and its financial performance.

Strong Performance, Driven By Johor

FP’s core business is in Malaysia. Or more specifically, based in Johor. Johor makes up about 65% of its revenue in 2023, and this is actually followed by Singapore (25%). If we follow this geographical pattern, we can see the focus of FP. To produce for the local market in Johor and export its surplus to Singapore.

Revenue has been on a strong upward trend. It grew from RM73.5 million in 2020 to RM114.2 million in 2023, boosted by increased growth from Singapore and surprisingly, Sarawak. Meanwhile, profits have tripled from RM2.9 million to RM8.7 million over the same period.

What Are FP’s Risks?

Being a perishable goods wholesaler, the risks always come from its supply chains. It’s crucial that FP maintains a good relationship with its suppliers. And this is not easy. Only 17% of its raw materials come from Malaysia. The other 87% come from foreign countries. Most importantly, China (29%), Thailand (22%), Vietnam (9%) and Bangladesh (8%) supplies most of FP’s materials.

Any problems that arise from the supply chains in these countries would hurt FP’s revenue and profits. And these problems are wildly unpredictable. Furthermore, FP runs the risks of having inventory that goes bad very quickly. It’s crucial that its supply chain and logistical services run very smoothly to prevent this. And we know, that isn’t always the case when it comes to supply chains.

What You Need to Do

If you are looking at FP as a potential investment, it’s important to understand the pros and cons of the company. Firstly, the pros is that it’s the only company from the industry listed in the market and it’s doing quite well in terms of financial performance. However, you need to take a closer look at how it’s using its IPO proceeds and the risks of running a perishable goods company.