Investment Highlights

• We maintain our BUY call with an unchanged FV of RM1.17/share based on a PER of 18x over FY20F EPS.

• According to statistics published by the Department of Veterinary Services, since end-June 2019, prices of eggs in Malaysia have risen by 7% while that of broiler chicken and day-old-chic (DOCs) have increased by 12% and 22% respectively (Exhibits 1,2 & 3). These are consistent with our expectations for a better 2H for Leong Hup on the back of improving ASPs for DOC, Broiler and eggs.

• On the other hand, soybean price climbed 4% and there was an uptick in corn price which rose by 24% in 10 weeks from May to July 2019 (Exhibit 4) which we believe contributed to the higher ASPs.

• We opine that the surge in corn price was due to historically low planting levels in the US as a result of widespread flooding.

• Compared to FY18, average YTD prices rose by circa 10% for eggs while for broiler and DOC, they have dropped by 9% and 4% respectively. Soybean and corn prices slipped by 5% and 0.7% respectively.

• We believe the drop in poultry prices in Malaysia was due to the cooler weather YTD which may have led to a higher market supply.

• According to our sensitivity analysis, a 10% increase in prices of Malaysian eggs, DOC and broiler chicken will lift earnings by 0.6%, 0.5% and 0.7% respectively. Malaysian eggs, broiler and DOC made up circa 4%, 6% and 6% respectively of the group’s revenue. Corn and soybean account for circa 19% and 17% of Leong Hup’s total cost of sales.

• Taking this into consideration, we expect Leong Hup’s earnings trajectory and margins to be in line with our forecasts with EBITDA margin of 11.9% in FY19F.

• We remained 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 provide growth potentials for the group.

Source: AmInvest Research - 25 Oct 2019