Investment Highlights

• We maintain our BUY call on Leong Hup International (LHI) with a lower fair value (FV) of RM0.96/share (RM1.04/share previously). Our FV is based on an unchanged PE of 17x FY22F EPS.

• LHI’s 1HFY20 core net profit of RM38mil (-52% YoY) came in at around 25% of our and 27% of street’s full-year earnings estimates, which is below expectations. We cut our earnings forecasts by 13% for FY20F, 8% for FY21F and 8% for FY23F.

• The variance was largely due to lower sales volume and average selling price for several products across the group’s operations. We believe demand was largely affected by the Covid-19 pandemic and restrictions on HORECA (hotel, restaurant and café) during the quarter.

• 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. This supported the poultry price in 2QFY20 to grow roughly 6% YoY for broiler chicken and 16% YoY for DOC.

• However, the higher poultry price was insufficient to compensate for the drop in sales volume and ASP for its other products.

• LHI’s 1HFY20 revenue shrank 4% YoY while EBITDA tumbled 29% YoY. EBITDA margin fell 3ppt YoY to 8%. 1HFY20 revenue fell in Malaysia (-5%), Singapore (-4%) and Indonesia (-17%).

• In Malaysia, ASP was lower for eggs (-10% YoY) and DOC (- 14% YoY) while sales volume of eggs also fell. In Indonesia, sales volume and ASP of eggs were lower while ASP for DOC dropped. Its feedmill segment also took a hit as sales volume of feedmill products slumped in Indonesia. In Singapore, sales volume of fresh chicken and duck was weaker.
• 1HFY20 revenue was slightly buoyed by improved performance in Vietnam (+18%) and the Philippines (+52%). Sales volume and ASP grew for Vietnam’s feedmill products. This was partly attributed to the contribution by the aquatic feedmill which was acquired in March 2020.
• The group’s EBITDA margin dropped 3ppt to 8% in 1HFY20. This was attributed to poor performance in its livestock and poultry related segment which saw EBITDA shrinking by 79% to RM35.3mil while EBITDA margin fell 8ppt to 2%. This was partially offset by the feedmill segment that experienced a 4ppt increase in EBITDA margin to 17%.

• Leong Hup is expecting volatile ASP of broilers and DOC in subsequent quarters due to the fluctuations in demand and adjustments in supply. Consumption patterns are affected by restrictions related to the Covid-19 pandemic. However, we think that Leong Hup’s earnings performance will be slightly stronger in 2HFY20 as restrictions on HORECA ease, and improving patronage of restaurants and hotels which should improve the group’s sales volume.

• 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 - 26 Aug 2020