Investment Highlights

• We maintain our BUY call on Leong Hup international (LHI) with an unchanged fair value of RM0.72/share. Our FV is based on 14x FY21Fx EPS.

• Key takeaways from LHI’s teleconference are: 1. Since the start of the Covid-19 pandemic, there has been a shift in shopping patterns for food products. 2. LHI’s expansion plans were recalibrated and projects were delayed due to unfavourable market conditions. 3. Costs of raw materials are expected to remain low in FY20F due to weak global demand for wheat products. 4. Poultry prices are expected to be volatile as small farmers are expected to ramp up broiler production as ASP increases in May 2020.

• Since the start of the Covid-19 pandemic, there has been a shift in shopping patterns from fresh food items to long shelf-life food products (i.e. nuggets, egg, processed meats) affecting demand for the group’s offerings.

• We believe this pattern will continue to persist in FY20F. Demand for fresh food items is expected to gradually recover once the pandemic is contained.

• LHI’s expansion plans have been recalibrated with some delays due to unfavourable market conditions. The group deferred five expansion projects as shown in Exhibit 3.

• LHI experienced minimal disruption in its production and supply chain from the onset of Covid-19 pandemic as poultry production is considered an essential service. The group is not expecting any significant impact to overhead and operating expenses in relation to the movement control order (MCO).

• LHI experienced improved sales volume in its feedmill segment, which grew 5.2% YoY, +1.3% YoY to 120.4mil of DOC chickens, +9.8% YoY to 32.6 mil broiler chickens and +1.7% YoY to 434.9mil eggs.

• COGS was lower at 73% where it dropped 2.4ppt YoY as raw material prices were favourable. Corn price fell 18% YTD while soybean slid 9% YTD. These raw material prices are expected to remain low in FY20 due to weak global demand. However, gross margin expansion arising from lower raw material pricing is only temporary as the cost savings will eventually be passed on to the customers.

• LHI is seeing improved demand for its broiler chicken in May. 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. The group is already seeing better DOC sales which we believe will be used to rear broiler chiken which takes roughly 35–40 days to grow. Hence, we believe the ASP for its livestock and poultry-related products will be volatile in coming months.

• Moving on to subsequent quarters, we believe poultry prices will be slightly lifted by demand from restaurants as dine-in operations restart. 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 longterm earnings growth underpinned by expansions of the feedmill and livestock businesses in Malaysia, Vietnam and the Philippines.

Source: AmInvest Research - 21 May 2020