Investment Highlights

• We maintain our BUY recommendation on Leong Hup International (LHI) with a lower fair value of RM1.04/share. We cut our earnings forecast for FY19F, FY20F and FY21F by 19.5%, 10.6% and 7.2% respectively. This is to account for a lower PBT margin resulting from depressed selling prices for some of its products.

• 9MFY19 core net profit of RM127.2mil (-17.8% YoY) was below our and street’s earnings estimates, accounting for 59.4% and 63.6% of full-year forecasts respectively. The variance was largely due to lower-than-expected margins as LHI was hit by weak selling prices for some of its products.

• LHI’s 9MFY19 revenue increased 7.6% YoY but EBITDA was flattish at RM410.9mil. EBITDA margin slipped slightly by 0.7ppt to 9.1% in 9MFY19 mainly due to poor ASP in several of its products in Indonesia, Singapore and Vietnam.

• Livestock and poultry-related product segment’s 3QFY19 revenue grew 5.3% YoY and 6.8% QoQ. This was on the back of higher ASP and sales volume in Malaysia’s eggs and broiler chicken. This was partially offset by a drop in ASP in Indonesia’s day-old-chick (DOC) and broiler chicken, and lower broiler chicken price in Vietnam. This resulted in an 8.1ppt YoY and 0.8ppt QoQ drop in EBITDA margin to 4.9%.
   
• 9MFY19 revenue of the livestock division fell 1.6% YoY to RM2.5bil. This was mainly due to the disposal of a subsidiary in its Singapore operations. The drop in revenue from Singapore was offset by higher revenues in Malaysia, Indonesia and Vietnam.
• LHI’s Malaysia operations’ ASP and sales volume of eggs grew in 9MFY19. However, this was offset by the lower prices for its broiler chicken and DOC.

• The group’s Indonesia operations saw an increase in revenue due to higher ASP and sales volume of DOC but lower broiler chicken prices in 9MFY19. Vietnam recorded an increase in sales volume of broiler but ASP and sales volume of eggs fell.

• 9MFY19 EBITDA margin for the segment fell 4.7ppt to 8.2% due to lower prices of DOC and broiler in Malaysia, broiler in Indonesia and eggs in Vietnam. These were partly cushioned by the higher price of eggs in Malaysia and DOC in Indonesia.

• According to the Department of Veterinary Services (DOVS), in 3QFY19 the selling price of DOC fell 1.7% YoY but up 47.5% QoQ. The selling price of broiler chicken grew 6.6% YoY and 28.3% QoQ while the selling price of eggs grew 4.8% YoY but was flattish QoQ.

Source: AmInvest Research - 27 Nov 2019