Investment Highlights

• We maintain our BUY call on Leong Hup International (LHI) with a lower FV of RM0.89. We have cut our earnings forecasts for FY20F, FY21F and FY22F by 9.1%, 9.4% and 5.9% respectively to account for soft selling prices expectations.

• We roll over our valuation period from FY20F to FY21F EPS, which is now pegged to a lower P/E of 15x (18x previously) to reflect the tougher market conditions.

• Key takeaways from LHI’s teleconference are: 1. FY20F and FY21F performance is expected to be driven by sales volume growth in emerging markets; 2. The group is expecting near-term consumption patterns to be disrupted by Covid-19; 3. Raw material prices could see downward pressure from the uncertainty in the global economic outlook.

• The group expects FY20F performance to be driven by sales volume growth in its overseas operations. Leong Hup’s operations in Vietnam enjoyed a higher selling price for its day-old-chicks (DOC), broiler chicken and livestock feed. This was on the back of heightened demand for chicken meat.

• Consumers in Vietnam substituted pork with chicken meat after supply fell due to the swine fever. Moving forward, we expect selling prices of poultry-related products in Vietnam to remain strong due to the shortage of pork.

• The group has recently completed the construction of its new hatchery in the Philippines in 3QFY19. We believe the full contribution from the Philippines in FY20F will help alleviate the downward pressure on group margins (the country’s EBITDA margin in FY19 was 15.0%, which is higher compared to total group’s 10.7% EBITDA margin).

• Leong Hup said that poultry prices were soft in February 2020, post-Chinese New Year festivities as well as due to the Covid-19 outbreak.

• Recall that selling prices were already under pressure in FY19 (Exhibit 1) due to a higher market supply of DOC and broiler chicken. This was partly attributed to the cooler weather, which stimulated the growth of livestock.

• According to the group, although Malaysia’s broiler chicken price grew to around RM4.30/kg by end-Jan 2020 (from around RM4.10/kg at the start of the year, up 5%), prices are expected to decline in February.

• The brunt of the Covid-19 impact is expected to be felt in Leong Hup’s Singapore operations, which is already facing soft poultry-related demand. We have reduced our selling price expectations in Malaysia and Singapore by 5–10% in our earnings model to reflect the softer outlook.

• Leong Hup’s raw material prices could see downward pressure from the uncertainty in the global economic outlook. The group typically purchases its raw materials 2 to 3 months ahead. However, its feedmill segment is a cost-plus business and changes in input cost are usually passed on to its customers.

• Nonetheless, we still expect the drop in raw material prices to benefit Leong Hup during the time lag of 1 to 2 months which will slightly mitigate the expected pressure on margins from depressed selling prices in the near term. As shown in Exhibit 3, FY19 corn and soybean prices were mixed (corn up 4.6% YoY while soybean dropped 5.4% YoY). YTD, these prices have slid slightly (corn down 3.1% and soybean dropped 3.8%).

• We believe that the long-term outlook for LHI is positive due to the stable demand of poultry as a staple product and strong long-term earnings growth underpinned by expansions of the feedmill and livestock businesses in Malaysia, Vietnam and the Philippines.

Source: AmInvest Research - 20 Feb 2020