Investment Highlights

• We maintain our BUY call on Leong Hup International (LHI) with a reduced fair value (FV) of RM0.91/share (vs. RM0.96/share previously). Our FV is based on an unchanged PE of 17x FY22F EPS.
• LHI’s 9MFY20 core net profit of RM58mil (-55.1% YoY) came in below expectations, at around 53% and 51% of ours and consensus expectations respectively. We cut our earnings forecasts by 14%, 8% and 5% respectively for FY20E, FY21F and FY22F.

• The variance was largely due to weaker-than-expected egg prices and a slower-than-anticipated recovery in 2HFY20, with weakened demand resulting from the Covid-19 pandemic. We predict that demand would continue to be suppressed until 1HFY21 and have adjusted our earnings forecast accordingly.

• Nevertheless, we still like LHI for its efforts in expanding its downstream business. Also, LHI is a beneficiary from a recovery in poultry demand and prices.

• LHI’s 9MFY20 revenue decreased 1.7% YoY to RM4,433mil while EBITDA fell 30% to RM355mil. The group’s EBITDA margin shrank by 3.2ppt to 8% in 9MFY20, primarily due to the weaker livestock and poultry products segment though this was slightly offset by a strong feedmill segment.

• EBITDA margin for livestock and poultry dropped by 5.9ppt YoY to 2.3% in 9MFY20 whereas feedmill EBITDA margin rose by 2.1ppt YoY to 17.1%.

• The group’s feedmill division posted a strong performance, with EBITDA improving by 9.8% YoY to RM336mil in 9MFY20. The strong earnings were largely driven by higher profits recorded in Vietnam in 9MFY20.

• Livestock and poultry products segment performed weaker, with a 2.6% YoY fall in revenue and a 72.3% YoY plunge in EBITDA in 9MFY20.

• The YoY decrease in revenue and EBITDA in 9MFY20 mainly arose from poor performances in Indonesia, Malaysia and Singapore. Revenue was affected by low ASP of DOC (day-old chicks) in Indonesia, low sales volume and ASP of eggs and DOC in Malaysia and weak sales volume of poultry and processed food in Singapore.

• Geographically, Vietnam is the best performer, boasting a 23% YoY 9MFY20 EBITDA improvement to RM108mil. Indonesia performed the worst, with its 9MFY20 EBITDA falling 48% to RM80mil.

• While egg ASPs in Malaysia remain on a downward trend, broiler and DOC price data has shown gradually rising and optimistic trends over the past months. We believe that prices will largely recover in FY21F on the back of improved demand.

• We remain positive on the feedmill segment, as it has been resilient enough to sustain strong EBITDA margins even in the worst months of the pandemic. With a somewhat improving situation over the next couple of months, we feel confident that this segment will continue to thrive.

• We believe that in the short term, LHI would continue to experience lower earnings dragged by the longer-thanexpected effects of the pandemic, pushing down restaurant and catering demand. On a positive note, we believe that the feedmill segment and Vietnam division would continue to record strong earnings.

• In spite of the short-term challenges, we reckon that the long-term outlook for LHI is positive due to the relatively stable demand of chicken, the group’s efforts in de

Source: AmInvest Research - 25 Nov 2020