Investment Highlights

• We maintain BUY on Leong Hup International (LHI) with an unchanged fair value (FV) of RM0.86/share. Our valuation is based on an unchanged PE of 17x FY22F EPS.

• Overall, an anticipated prolonged supply shortage as a result of the closure of several small-to-mid-sized farms is anticipated to keep poultry prices at decent levels for the time being. Coupled with a recovery in HoReCa (hotels, restaurants and cafés) demand across multiple countries due to mass vaccinations, we are optimistic of a solid recovery in LHI’s earnings within the year.

• Key takeaways from LHI’s results briefing include:

1. Demand is generally rising up across multiple countries. However, Leong Hup believes that because of the closure of multiple small-and-mid-sized players, the current supply shortage will last for quite some time.
    
2. In particular, ASP in Indonesia has spiked as a result of the government taking steps to control supply levels. Demand in the Philippines is also anticipated to see a boost as mass vaccinations begin in February or March 2021.
    
3. Due to weaker Malaysian broiler demand in Malaysia, LHI has decided to postpone the expansion of closed-house broiler farms until demand recovers.
    
4. Rising animal feed raw material prices will increase fixed costs within the coming year. With strong soybean demand from China and wet weather conditions in Brazil, raw material prices are not anticipated to fall anytime soon.
    
5. The completion of a Luzon feed mill in 1QFY21 is expected to satisfy demand from farms, slashing animal feed costs in the Philippines. Animal feed makes up 60–70% of total livestock costs.
    
6. LHI is targeting to open 160 Baker’s Cottage (B2C) outlets by end-FY21F. The venture recently earned a profit in 4QFY20. It accounted for 8% of Malaysian revenue for the year. Expansionary plans to other SEA countries are still in planning phases.
    
7. Both Vietnam and the Philippine segments are expected to bring in higher contribution by next year, given that recently completed and ongoing projects are centred on those areas.

Source: AmInvest Research - 25 Feb 2021