Investment Highlights

• We maintain BUY on Leong Hup International (LHI) with a reduced fair value (FV) of RM0.86/share (vs. RM0.91/share previously). Our FV is based on an unchanged PE of 17x FY22F EPS. We have tweaked LHI’s FY22F net profit downwards by 7% to account for lower feed mill income resulting from higher raw material costs.

• LHI’s core net profit of RM109mil (-35% YoY) was above expectations, accounting for 117% and 120% of ours and consensus estimates respectively. The variance was largely a result of better margins arising from strong performances in Indonesia in 4QFY20. In Indonesia, ASP of broiler and day-old chicks (DOC) rose while DOC sales volume improved in 4QFY20.

• We have increased our earnings forecasts by 10% for FY21E to factor in a faster-than-expected recovery in poultry prices. However, we have reduced our earnings forecast by 7% for FY22F as we believe that rising feed mill raw material prices will affect the group’s feed mill income and increase operating costs.

• Nevertheless, we remain positive on the group’s long-term outlook due to the strong long-term earnings growth underpinned by expansions of the feed mill, livestock and processed goods business in Vietnam and the Philippines. We are confident that the recovery in poultry demand will sustain this year and next year as the effects of mass vaccinations drive up HoReCa demand.

• LHI’s FY20 revenue was flat at RM6.0bil while EBITDA fell by a steep 17% YoY to RM541mil. This was due to a weak performance by the livestock and poultry product segment. A silver lining is the strong sales in the Vietnamese feed mill segment, which helped bolster the group’s EBITDA.

• On a negative note, the livestock and poultry product segment suffered from depressed ASP and sales volume of eggs in Malaysia in FY20. Poor processed food and fresh chicken sales volumes in Singapore also contributed to the weak performance in FY20.

• Higher sales volume and ASP of eggs in Vietnam as well as increased sales volumes of broilers and dressed chickens in the Philippines offset the poor Malaysian and Singaporean showings.

• LHI’s 4QFY20 revenue rose by 4% YoY to RM1.6bil, while its EBITDA rose by 15% YoY to RM168mil. This improvement was primarily a result of strong prices and sales volume of DOCs in Indonesia and eggs in Vietnam.

• Geographically, LHI’s Vietnam segment had the best showing in FY20, with a 16% YoY increase in revenue to RM1.6bil and 7% YoY increase in EBITDA to RM140mil. This was due to higher sales volume and ASP of eggs and livestock feed.

Source: AmInvest Research - 24 Feb 2021