Investment Highlights

• We initiate coverage on Leong Hup International (LHI) with a BUY recommendation, pegging a fair value of RM1.43. Our valuation is based on 20x PER over FY20 earnings which is at a discount to its regional peers’ market cap weighted average of 23.4x FY20 earnings (Exhibit 18). We believe LHI’s 20x valuation is justified given its significant regional presence, production scale and a clear expansion plan (Exhibit 13).

• LHI is one of the largest fully integrated producers of poultry, eggs and livestock feed in Southeast Asia. At present, LHI operates in Malaysia, Singapore, Indonesia, Vietnam and the Philippines, which are attractive consumer markets, with a population of almost 500mil people with significant growth potential.

• The fully integrated business model provides flexibility, synergies and resilience through economic cycles. With detailed expansion plans for its feed mills and livestock businesses in Malaysia, Vietnam and the Philippines, we believe the long-term prospects for LHI to be positive.

• With an annual production of 495mil day-old chicks (DOCs), 99mil broiler chickens, close to 2mil MT of livestock feed and more than 1.7bil eggs, LHI has the scale which provides advantage over smaller players across the value chain such as bargaining power, outsourcing of raw materials and the production and distribution of poultry and livestock feed.

• We are projecting LHI’s PATAMI to grow by 29.4%, 8.2% and 7.9% to RM240.7mil, 260.5mil and 281.2mil for FY19– FY21F respectively, representing a 3-year CAGR of 14.7%.

• Management is targeting a payout ratio of approx. 30% from the group’s PATMI each year. We expect LHI to pay dividends of 2.0 sen, 2.1 sen and 2.3 sen for FY19–FY21 translating into yields of 1.9%, 2.1% and 2.2% respectively.

• The stock offers a potential upside of more than 30% and dividend yield of 1.9%. We initiate coverage on LHI with a BUY recommendation.

• Our BUY recommendation is premised on the group’s stable earnings from Malaysia and Singapore’s business while regional expansion at Vietnam and the Philippines provides growth potential.

Source: AmInvest Research - 17 Jun 2019