Investment Highlights

• We maintain our BUY call on Leong Hup International (LHI) with a lower fair value (FV) of RM0.72/share (RM0.76/share previously). Our FV is based on 14x FY21x EPS.

• LHI’s 1QFY20 core net profit of RM21.8mil (-64% YoY; -46% QoQ) missed earnings expectations, coming in at around 13% of ours and street’s full-year estimates. Although we believe poultry prices will remain subdued, we do anticipate a slight recovery in selling prices in subsequent quarters as the movement control order (MCO) is relaxed and dine-ins at restaurants are allowed. We also see a gradual improvement in selling prices once the MCO is lifted in June 2020.

• We reduce LHI’s net profit by 5.4% for FY20F, 4.9% for FY21F and 4.4% for FY22F to account for weaker EBITDA margins. LHIB was hit by lower selling prices as demand from fast food restaurants fell significantly during the MCO. We lower our selling price and sales volume assumption by roughly 2–5%.

• We believe there was a short-term push for selling prices in May due to a temporary closure of a poultry processing plant in Pedas, Negeri Sembilan where some workers contracted Covid-19. The Kerabat Processing House has a slaughtering capacity of 90,000 birds per day. However, we believe the increase in selling price will be short-lived as supply of poultry returns when the plant resumes operation.

• LHI’s 1QFY20 revenue dropped 5% YoY (-7% QoQ) but EBITDA tumbled 38% YoY (-17% QoQ). EBITDA margin fell 5ppt YoY (-1ppt QoQ). This was mainly due to depressed selling prices of several of its products across Indonesia, Vietnam, Singapore and Malaysia.

• The livestock and poultry-related product segment’s 1QFY20 revenue fell 9% YoY (-11% QoQ). This was on the back of lower selling prices for Malaysia’s DOC, eggs and broiler chicken. Sales volume of DOC also slid YoY. Indonesia experienced lower selling price and sales volume of DOC. Singapore had lower sales volume for fresh chicken and duck. These were partially offset by higher contribution from Vietnam as sales volume improved for its broiler chicken and eggs. The lower selling prices and sales volume have caused EBITDA to plunge 95% YoY (-89% QoQ).
   
• Feedmill segments’s 1QFY20 revenue inched up 1% (-3% QoQ) primarily due to higher sales volume of livestock feed in Vietnam but partially offset by lower selling prices and sales volume of livestock feed in Indonesia. EBITDA for the segment jumped 40%YoY (+25% QoQ). EBITDA margin soared 5ppt YoY (+4ppt QoQ) on the back of higher sales volume in Vietnam. 
   
• According to The New StraitsTimes, the maximum price control scheme will be enforced from today till 3 June 2020, throughout Hari Raya Aidilfitri, Pesta Kaamatan and Hari Gawai. The retail prices for Aidilfitri, Pesta Kaamatan and Hari Gawai will be RM6.20–RM6.70 per kg for live chicken, RM7.50–RM9.50 per kg for standard chicken, RM9.80 per kg for super chicken, RM0.39–RM0.41 per grade A egg, RM0.38–RM0.40 per Grade B egg and RM0.37–RM0.39 per Grade C egg. We believe LHI will be minimally impacted as this is a usual practice during festive seasons.
   
• Moving on to subsequent quarters, we expect poultry prices to recover slightly as restaurants restart operations for dine-ins. We believe the growth for FY20F will be largely driven by LHI’s expansion plans (Exhibit 2). We believe that the long-term outlook for LHI is positive due to relatively 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 - 20 May 2020