Investment Highlights

• We maintain our BUY call, forecasts and FV of RM1.17/share based on PER of 18x over FY20F EPS.

• Key takeaways from Leong Hup’s tele-conference last Friday are as follows:

1. The group is able to cushion the low prices for its broiler chickens and day-old-chicks (DOC) with effective cost control and economies of scale. To recap, Leong Hup faced a tough 2QFY19 due to the depressed prices of broiler chickens and DOC brought about by a higher market supply of DOC and birds as the cooler weather promotes growth of the livestock. Despite lower market prices for its broiler and DOC, the group’s performance was buoyed by increased sales volume across all its product segments as shown in Exhibits 1–4. As such, we anticipate a better 2HFY19 as the demand for the group’s products remains strong.

2. The group’s feedmill production capacity has increased 12.9% to 882.4K MT in 2QFY19 while its planned expansion is going smoothly. The group is expected to complete the construction of its new hatchery in the Philippines (+14mil eggs) and a spent grain drying facility in Vietnam within a month from now. By the end of FY19, the group expects to complete its construction of additional closed-house farms and machinery (+2.7mil broiler DOCs), a third pelleting line (142.5K MT feedmill) and an automated bagging & robotic pelletiser in Vietnam. The feed production ramp-up in Indonesia and Vietnam is expected to satisfy the anticipated increase in demand from external customers.

3. Leong Hup will continue to focus on further improving its management of costs, modernizing its farms with automation features to further drive cost savings and further explore towards downstream capabilities. The group is looking at setting up a new central kitchen facility in Singapore to expand its ready-to-eat and ready-to-cook segment.

• We anticipate a better 2H for Leong Hup on the back of improved market prices for DOC and broiler which 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 Leong Hup is still positive given the stable demand of chicken while its source of income outside Malaysia such as Singapore, Vietnam, Indonesia and the Philippines will provides growth potentials for the group.

Source: AmInvest Research - 3 Sept 2019