Investment Highlights

• We maintain our BUY recommendation on Leong Hup International (LHI) with an unchanged fair value of RM1.17/share.

• 1HFY19 core net profit of RM110.98mil (-6.2% YoY) was in line our and street’s earnings estimates, accounting for 51.9–52.4%% of full-year forecasts respectively.

• LHI’s 1HFY19 revenue increased 7.7% YoY to RM2,983.6mil resulting in a 5.3% rise in core EBITDA to RM293.5mil (after excluding RM34.3mil in IPO expenses). Core EBITDA margin slipped 0.2ppt to 9.8% mainly due to a significant drop in ASP in several of its products.

• Livestock and poultry related products segment’s 1HFY19 revenue fell 4.8% to RM1,663.3mil. This was mainly due to the disposal of a subsidiary in its Singapore operations.

• There was also a decrease in Malaysia’s contribution due to a drop in ASP of broiler and day-old-chick (DOC) although it was slightly mitigated by a higher ASP and sales volume of eggs.

• Its Indonesia operations saw an increase in revenue due to higher ASP and sales volume of DOC while Vietnam recorded an increase in sales volume of broiler. This was partly offset by lower ASP and sales volume of eggs in Vietnam.

• 1HFY19 EBITDA margin for the segment fell 2.9ppts to 9.9%, mainly due to lower margin from lower price of DOC and broiler in Malaysia, broiler in Indonesia and eggs in Vietnam. These were partly cushioned by higher prices of eggs in Malaysia and DOC in Indonesia.

• Feedmill segment’s 1HFY19 revenue increased 29.8% to RM1,314.9mil due to a higher sales volume and ASP of livestock feed in Indonesia and Vietnam.

• 1HFY19 EBITDA margin grew 2ppts to 13.1% primarily on the back of higher sales in Indonesia and higher sales in Vietnam as the groups commenced operation in its Dong Nai feedmill plant in January 2019.

• The ASP of LHI’s broiler DOC in Malaysia in 2QFY19 fell 38.6% YoY to RM1.21 per DOC while the selling price of broiler chicken dropped 14.7% YoY to RM3.99 per kg.

• On a positive note, the market prices for DOC and broiler have increased to RM2.10 per DOC and RM5.40 per kg respectively on 16 Aug 2019 as shown in Exhibits 2–3.

• We remain convinced 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 Phillipines will provide growth potential for the group.

Source: AmInvest Research - 30 Aug 2019