Investment Highlights

• We maintain our BUY call on Leong Hup International (LHI) with a higher FV of RM0.92 (vs. RM0.89/share previously). We have raised our FY20F, FY21F and FY22F earnings forecasts by 1%, 4% and 4% respectively.

• Leong Hup has proposed to acquire a feedmill factory in Vietnam for a total cash consideration of VND369,272.1mil (circa RM67.0mil). The proposed acquisition is expected to be fully completed within 6 months from 28 Feb 2020.

• The rationale given behind the proposed acquisition is as follows:

1. The strategic location of the feedmill factory, which is surrounded by active livestock farming and aqua farming activities, would allow the group to penetrate the Vietnam market while remaining competitive. It would also result in cost savings as raw materials and finished products (like rice base ingredients and other local raw materials) can be transported using the canal system.

2. The acquisition is also positive as it would have taken the group at least two years to source for suitable land and construct a new feed mill. The feedmill factory is fully functioning and is ready for immediate production upon handover.

• The acquisition offers further diversification of its Vietnam operations (venturing in to aqua feed market) and further market share expansion in the Southern Region of Vietnam.

• The acquired feedmill factory will be used for producing aqua feed, poultry feed and other animal feed. The group plans to add another poultry line to begin production by end-2020. We expect the factory’s capacity of 118.8K MT per annum will be doubled after the expansion (+17.5% to a combined capacity in Vietnam).

• Leong Hup believes that the acquisition will contribute positively to its earnings. The acquisition is expected to help drive the group’s feed sales volume further and result in synergistic benefits through cost and capital efficiencies.

• We are positive on the news as we expect the acquisition to boost LHI’s net profit for FY21F by 4–6%. We assume that the acquisition would be funded largely through cash. The fall in cash is envisaged to result in an estimated net gearing of 1.04x in FY20F.

• LHI’s long-term outlook is positive due to the stable demand for poultry and strong earnings growth underpinned by expansions of the feedmill and livestock businesses in Malaysia, Vietnam and the Philippines.

Source: AmInvest Research - 10 Mar 2020