Investment Highlights

• We raise our call on Leong Hup to BUY from HOLD previously with a higher fair value of RM0.74/share (from RM0.50/share), by rolling over to FY23F PE of 14x, at parity to its 5-year mean. This also reflects an unchanged neutral ESG rating of 3 stars.

• Pending an analyst briefing later today, we raised our earnings forecast by 49% for FY22F, 15% for FY23F and 2% for FY24F.

• Leong Hup’s 9MFY22 core net profit (CNP) of RM128mil beat expectations, already 19% above our earlier FY22F net profit and 8% ahead of consensus. In comparison, 9M accounted for 83%-80% of FY18-19 full-year CNP.

• The group did not declare any interim dividend for the quarter under review, as expected.

• YoY, the group’s 9MFY22 revenue rose by 26% on the back of higher contributions from its livestock/poultry operation (+30%) and feedmill business (+21%), buoyed by higher average selling price and sales volume of broiler chickens and day-old-chicks (DOC).

• 3QFY22 revenue improved by 31% YoY at RM2,361mil whereas CNP of RM67mil represented a turnaround from a net loss of RM54mil in 3QFY21, affected by pandemic lockdowns.

• The 5.4x YoY rebound in 3QFY22 group EBITDA was underpinned by its livestock/poultry, which swung back to the black at RM88mil vs. LBITDA of RM55mil in 3QFY21, and feedmill increasing by 34% YoY to RM126mil. This was partly supported by government subsidies and recognition of RM52mil grant on livestock.

• Likewise, 3QFY22 topline grew 4% QoQ while bottomline surged 66% QoQ (livestock/poultry EBITDA +54% and feedmill EBITDA +35%).

• We are positive on Leong Hup’s near-to-medium term outlook as its market share could have strengthened during the pandemic along with sharp commodity price hikes that have possibly removed some smaller competitors, against the backdrop of improving industry fundamentals. Nonetheless, we do not discount the possibility of higher raw material prices that could affect its bottomline should inflation rates taper slower than expectation.

• The group currently trades at a compelling FY23F PE of 8.9x, substantially lower than its 5-year average of 13.6x.

Source: AmInvest Research - 30 Nov 2022