Investment Highlights

• We maintain our BUY call on Leong Hup International (LHI) with a higher fair value of RM0.88/share. Our FV is based on a higher PE of 17x FY21F EPS.

• We take this opportunity to raise our PE multiple to 17x from 14x as we believe the worst is over for poultry prices. We believe demand should start to recover 2HFY20 after the ease of MCO as fast-food restaurants reopen. We maintain our earnings forecasts as we think that the impact of the acquisition will be immaterial to the group’s performance at the start.

• Leong Hup International has recently acquired 100% of The Bakers Cottage Sdn Bhd (TBC) for RM17.9mil. The group is also acquiring TBC Retail Business, with 6 retail outlets in Melaka, Negeri Sembilan and Johor, from Astaka Shopping Centre (Muar) Sdn Bhd for RM1.5mil. The group is also acquiring TBC Retail Business with 3 retail outlets in Selangor, from Poly-yarn Industries Sdn Bhd for RM0.9mil.

• We think that the valuation is slightly expensive as the purchase price implies a historical PE of 30x, which is much higher than our valuation of Leong Hup at 17x FY21F PE.

• The impact to gearing will be minimal. The RM20.3mil purchase will be funded by internally generated funds and borrowings. It would increase net gearing to 1.03x from 1.02x.

• We are of the view that the acquisition is a long-term positive for the group. However, we think that the impact to earnings will not be material at the start. TBC made a net profit of RM593K in FY19, which is 0.4% of LHI’s total net profit in FY19.

• However, the acquisition provides the group with vertical integration in its businesses. We think that this gives the group more control in the movement of its poultry products throughout the whole supply chain as it introduces to the group a B2C business.

• During the movement control order (MCO), the sales of TBC’s chicken food products grew exponentially with its successful promotional campaign. As poultry prices were low during the period, TBC was able to offer its products at a low price (whole roast chicken for RM9.90). TBC saw its sales peak at 14.5K birds per day (average daily sales was 4.5K birds pre-MCO). As demand normalises with the easing of the MCO and reopening of restaurants, the group is expecting daily sales to average at around 8–9K birds per day.

Source: AmInvest Research - 30 Jun 2020