Investment Highlights

• We maintain our BUY recommendation on Leong Hup International (LHI) with a lower fair value of RM1.02/share (vs. RM1.04 previously). Our valuation is pegged to a P/E of 18x FY20F EPS.

• LHI’s FY19 core net profit of RM167.2mil (after excluding impairment loss on receivables of RM16.6mil) was in line with our and consensus’ earnings estimates, accounting for 97.1% and 96.6% of full-year forecasts respectively. However, we have trimmed our earnings forecast for FY20F and FY21F by 2.4% and 3.4% as we expect soft selling prices to persist in the near term. We introduce our FY22F earnings forecast of RM243.8mil.

• LHI’s FY19 revenue increased 5% YoY but EBITDA was flattish at RM650.5mil. EBITDA margin slipped 0.6ppts to 10.7% mainly due to depressed selling prices of several products in Indonesia, Vietnam, Singapore and Malaysia.

• The livestock and poultry-related product segment’s 4QFY19 revenue fell 3.7% YoY. This was on the back of lower selling prices for Malaysia’s DOC, eggs and broiler chicken. Sales volume of DOC fell YoY. Indonesia’s selling price and sales volume for DOC declined as well. This was partially offset by its higher broiler chicken’s selling price and sales volume. Singapore’s processed food suffered a lower selling price.
   
• Revenue contribution from Leong Hup’s poultry operation in Vietnam improved (+16% YoY to RM374mil) on the back of higher selling prices and sales volume of broiler chicken due to the robust demand of chicken meat. We believe this was due to the swine fever in Vietnam, which resulted in consumers substituting pork meat with chicken meat.
   
• Feedmill segment’s 4QFY19 revenue rose 1.7% YoY primarily due to increase in sales volume of livestock feed in Vietnam.
   
• EBITDA in 4QFY19 slid 15% to RM146.3mil. EBITDA margin dropped 2ppts to 9.5% largely dragged by its Singapore and Indonesia operations.

• FY19 revenue of the livestock division dipped 2% YoY to RM3.4bil. This was mainly due to the disposal of a subsidiary in its Singapore operations. The drop in revenue from Singapore (-17% YoY to RM779.1mil) was offset by higher revenues in Indonesia and Vietnam.

• Indonesia recorded increased sales volume of DOC and broiler chicken. While Vietnam enjoyed higher selling price and sales volume of its broiler chickens, these were offset by lower selling price and sales volume of eggs.
   
• The livestock division’s FY19 EBITDA tumbled 35% to RM257.4mil due to lower selling prices of Indonesia’s broiler chickens and DOC, eggs in Vietnam, processed food and fresh chickens in Singapore as well as broiler chickens and DOC in Malaysia.
   
• The feedmill segment’s FY19 revenue climbed by 17% YoY primarily due to higher sales volume and selling price of livestock feed in Indonesia and Vietnam. The EBITDA for the segment surged 53% YoY to RM393.1mil on the back of better performance in Indonesia as well as higher sales contribution from Vietnam following commencement of its Dong Nai feedmill plant in January 2019 (which added 285K MT of capacity).
   
• Moving into FY20F, we anticipate poultry prices in Malaysia to remain subdued. We believe that growth in FY20F will be driven largely by LHI’s expansion plans (Exhibit 2). We also expect higher selling prices in Vietnam as demand for chicken meat continues to rise due to a shortage of pork meat. We remain convinced that the long-term outlook for LHI is positive due to the stable demand of chicken and strong long-term earnings growth underpinned by expansions of the feedmill and livestock businesses in Malaysia, Vietnam and the Philippines.

Source: AmInvest Research - 19 Feb 2020