Investment Highlights

• We maintain our BUY call, forecasts and FV of RM1.04/share on Leong Hup International (LHI).

• Key takeaways from LHI’s briefing yesterday are: 1. 4QFY19 performance is expected to be driven by overseas operations, which should compensate for seasonally weaker poultry prices in Malaysia. 2. The group expects ASP for its products to recover and normalize in FY20F. 3. Raw material costs are expected to remain favourable. 4. LHI is envisaged to achieve improved economies of scale as sales volume increases. 5. LHI plans to penetrate Myanmar’s market to tap into the growing economy and meat consumption.

• The group expects 4QFY19 performance to be driven by the overseas operations. To recap, 3QFY19 enjoyed higher selling prices for its products as well as increased sales volume across all its product segments (see Exhibits 2–3). The weak poultry prices in 4QFY19 in Malaysia are expected to affect the group’s revenue. However, this is anticipated to be compensated by higher selling prices of broiler chicken and day-old chick (DOC) in Vietnam and Indonesia.

• The group said that the trend of selling prices in FY19 has been abnormal YTD. We believe selling prices were under pressure due to a higher market supply of DOC and broiler. Also, the cooler weather in 2QFY19 had stimulated the growth of livestock. Going forward, selling prices of these products are expected to recover in 1QFY20 and 2QFY20. The group expects selling prices of these products to normalize in FY20F. We believe with the expected recovery of its selling prices in FY20F, EBITDA margin for its livestock segment will follow suit (recall that it dropped 4.7ppt to 8.2% in 9MFY19).

• The group benefitted from favourable raw material prices as shown in Exhibit 4. Prices of corn and soybean had dropped 0.9% and 4.6% YoY respectively. The raw material prices are expected to remain stable.

Source: AmInvest Research - 28 Nov 2019