Investment Highlights

• We maintain our BUY call on Leong Hup International (LHI) with a lower fair value of RM0.94/share (from RM0.96/share). Our FV is based on PE of 17x FY22F EPS.
• We cut our earnings forecasts by 20% for FY20F, 3% for FY21F and 2% for FY22F. We have lowered our EBITDA margin assumption for Leong Hup, especially in 2HFY20, to account for tough operating conditions during the Covid-19 pandemic. We think that the Covid-19 situation will gradually ease by next year.
• 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.
• Key takeaways from LHI’s teleconference are:

1. Poultry prices are expected to remain volatile as the outlook in 2HFY20 remains murky with uncertainties on the impact of Covid-19 pandemic on consumer demand. In July, the price of day-old-chick (DOC) is around RM1.50 in Malaysia, RM1.40 in Vietnam and less than RM1 in Indonesia. The price of broiler is around RM4.10 in Malaysia and less than RM4 in Vietnam and Indonesia. Leong Hup is expecting volatile ASP of broilers and DOCs in subsequent quarters due to the fluctuations in demand and adjustments in supply. Consumption patterns are affected by Covid-19-related restrictions. However, we think that Leong Hup’s performance will be slightly stronger in 2HFY20 as restrictions on HORECA ease, improving patronage of restaurants and hotels which should improve the group’s sales volume.

2. LHI’s expansion plans were recalibrated as the group reprioritizes its operations (expansion plans shown in Exhibit 1). LHI has delayed non-critical capex projects due to market uncertainties and challenges stemming from the pandemic (delayed projects shown in Exhibit 2). The group plans to spend RM350mil on capex in FY20F (around RM50–100mil per country).

3. LHI currently runs 75 The Bakers Cottage (TBC) outlets. The group plans to open at least another 5 outlets this year with a target of 150 stores by end-2021. TBC’s performance has been improving, achieving roughly RM1mil EBITDA in July 2020.

Source: AmInvest Research - 27 Aug 2020