Investment Highlights

• We maintain our BUY call on Leong Hup International (LHI) with a reduced fair value (FV) of RM 0.99/share (vs. RM1.02/share previously) based on an unchanged PER of 17x FY22F EPS. We make no ESG-related price adjustment for our rating of 3 stars.

• LHI’s 1HFY21 earnings of RM98.9 mil came in below expectations, making up 47% and 51% of our full-year forecast and the full-year consensus estimates respectively. We were expecting stronger 2Q results before a dip in 3Q. Higher commodity costs in feedmeal production affected the group’s earnings deeper than expected.

• With inventory of lower cost raw materials running out, the group can no longer maintain the sale of feedmeal at high prices without being subject to higher input costs. Hence, we doubt that the company will be able replicate 1QFY21’s supernormal feedmeal earnings in the next 12 months.

• With the SEA region experiencing a flare-up of Covid-19 cases, we expect 2HFY21’s earnings to be heavily affected by pandemic lockdowns as poultry demand plummets. As a result, we cut our earnings forecast for FY21E/FY22F/FY23F by 21%/3%/1% respectively.

• Nevertheless, on a longer term, LHI’s earnings outlook remains intact, premised on a recovery in hotel, restaurant and café (HoReCa) demand and stable poultry average selling prices (ASP) notwithstanding delays in capacity expansion that are likely to affect the following year’s earnings. Additionally, corn and soybean prices have been trending downward, boding well for the group.

• LHI posted a revenue of RM1.85bil in 2QFY21, showing a growth of 11% QoQ and 30% YoY. Higher sales volume and ASP in poultry and feedmeal as well as an expansion in The Baker’s Cottage (TBC) downstream channels contributed to the stronger revenue.

• However, EBITDA fell sharply by 33% QoQ in 2QFY21 with EBITDA margins falling by 4.7ppt mostly due to fluctuations in the commodity market weighing heavily on feedmill segment’s earnings. Improvements in livestock contributions and margins did little to offset these effects.

• Apart from the Philippines, the group performed better revenue wise on a QoQ basis in each of its geographical segments. Rising Covid-19 cases in the Philippines dragged down feedmeal sales, though livestock contributions saw improvements.

Source: AmInvest Research - 25 Aug 2021