Investment Highlights

• We maintain our BUY call on Leong Hup International (LHI) with a higher fair value of RM0.93/share (from RM0.74/share) based on an unchanged FY23F PE of 14x – 0.5 standard deviation above its 5-year mean of 13x. This also reflects an unchanged neutral ESG rating of 3 stars.

• We raised our FY23F earnings by 26% and FY24F by 10% after LHI FY22 results exceeded our expectations. The group’s FY22 earnings of RM219mil were 30% above our estimate and 28% ahead of consensus. We introduce FY25F earnings of RM371mil premised on a revenue growth of 9% YoY and flattish pretax margin of 3.6%.

• YoY, FY22 earnings rose by 2.6x on the back of higher contributions from its livestock/poultry operation (+27%) and feedmill business (+26%), buoyed by higher average selling price and sales volume of broiler chickens, day-old chicks (DOC) and eggs. Government subsidies of RM90mil on livestock segment also contributed partly to the radically improved earnings.

• Similarly, 4QFY22 revenue improved by 28% YoY to RM2,322mil whereas earnings jumped 2.4x YoY mainly on better contributions across livestock (+19% YoY) and feedmill (+40% YoY) operations, as well as government subsidies of RM25mil for the livestock division. All operating countries also performance strongly, except for Singapore (-8% YoY).

• QoQ, 4QFY22 topline dipped by 2%, affected by lower selling price and volume of DOC and livestock feed in Indonesia as well as broiler chickens in Vietnam. However, the impact was offset by better sales volume of broiler chickens and DOC in Malaysia, driving group earnings higher by 35%.

• We are positive on Leong Hup’s near-to-medium term outlook on its industry leadership alongside a strong market share of 40%. While we take note of the high import cost of chicken feed, we believe the synergies between its upstream business and feedmill operations could allow partial cost pass-through.

• Also, the group’s better economies of scale are an added advantage compared to its relatively smaller peers which currently face challenges of high feed costs that erode margins and constrain production.

• The group currently trades at a compelling FY23F PE of 7x, substantially lower than its 5-year average of 13x.

Source: AmInvest Research - 1 Mar 2023