Investment Highlights

• We maintain our HOLD recommendation on Leong Hup International (LHI) with an unchanged fair value (FV) of RM0.50/share based on a target FY22F PE of 17x. There is no ESG-related price adjustment for our unchanged rating of 3 stars.

• We make no changes in our earnings forecasts as LHI’s 1HFY22 net profit of RM61mil (-39% YoY) was deemed broadly in line with our expectations. The earnings accounted for 56% of our FY22F net profit and 53% of consensus. As a comparison, 1H contributed 48%–64% of full-year FY18-FY19 earnings.

• The group’s 2QFY22 earnings doubled QoQ and rose 36% YoY to RM41mil, mainly due to RM15mil lumpy government subsidies recognised during the quarter. Recall that the claiming process was bogged down by red tape, requiring several levels of approval which caused payment delays.

• QoQ, LHI’s sequentially stronger revenue of RM2.3bil (+9%), in which livestock rose 10% and feed mill 7%, was mainly driven by higher sales volume and average selling price (ASP) of broiler chickens in Vietnam. Higher ASP of livestock feed in Vietnam and Indonesia also contributed to the improvement in sales.

• Notably, all LHI’s operating countries reported improvement in sales QoQ and YoY as demand recovered following the pick-up in broader economic activities in this region.

• However, the livestock segment’s 1HFY22 EBITDA margin declined 6.8% points YoY and feed mill slid 2.3% points YoY due to higher raw material costs, which led to the decline in earnings.

• The stock is trading at an undemanding valuation of 10x FY22F PE, compared to the KL Consumer Product Index’s 5-year historical average of 18x. However, we believe the discount is justified given the company’s limited pricing power that could lead to volatile earnings under the current inflationary environment. Moreover, elevated input costs are likely to cap LHI’s potential earnings recovery.

• Key rerating catalysts are the expansion of its downstream business-to-consumer channel beyond Malaysia and the normalisation of raw material prices.

Source: AmInvest Research - 1 Sept 2022