Investment Highlights

• We cut Leong Hup International’s (LHI) FY19–21 net profit forecasts by 11.1%, 9.1% and 8.7% to RM214.0mil, RM236.8mil and RM256.7mil respectively. Our earnings downgrade is in response to the company’s announcement on Bursa Malaysia dated 9 Aug 2019 that management expects a significantly lower net profit in 2QFY19 as compared with 2QFY18 due to a significant decline in the average selling prices (ASP) in most of the products sold by the LHI, particularly in Malaysia.

• Following the earnings revision, our fair value is reduced to RM1.17 from RM1.46 based on a PER of 18x over FY20 earnings. Nonetheless, the stock still offers a potential upside of 38%, hence, we are maintaining our BUY recommendation.

• The ASP of LHI’s broiler day-old-chicks (DOC) in Malaysia in 2Q2019 was RM1.21 per DOC, representing a decline of 38.6% from RM1.97 per DOC in 2Q2018. Meanwhile, the selling price of broiler DOC in Malaysia tumbled to as low as RM0.90 per DOC in 2Q2019. In comparison, the lowest selling price of the group’s broiler DOC in 2Q2018 was RM1.60 per DOC.

• For broiler chicken in Malaysia, the ASP declined by 14.7% to RM3.99 per kg as compared to RM4.68 2Q2018. Selling price of broiler chicken in Malaysia declined to as low as RM2.60 per kg in 2Q2019. In comparison, the lowest selling price of broiler chicken in 2Q2018 was RM3.90 per kg.

• On a positive note, market prices of broiler DOC and broiler chicken have increased to RM2.00 per DOC and RM5.00 per kg respectively on 5 Aug 2019. Meanwhile, management also guided that the group’s operating costs are relatively stable while sales volume remain on an uptrend.

• We believe this is a temporary problem as volatility in selling prices are beyond the control of the management; and we shall remain cautious on price movements of broiler DOC and broiler chicken.

• We reckon that the long-term outlook for LHI remains positive given the stable demand of chicken while its source of income outside Malaysia such as Singapore, Vietnam, Indonesia and the Philippines will provide growing potentials for the group.

• Despite our lower fair value, the stock still offers a potential upside of 38% and dividend yield of 2.0%. Hence, we maintain our BUY recommendation on LHI.

Source: AmInvest Research - 13 Aug 2019