Investment Highlights

• We keep our BUY call on Leong Hup with the same fair value of RM0.93/share based on FY23F PE of 14x, at parity to its 5-year mean. This also reflects an unchanged neutral ESG rating of 3 stars.

• We made no changes to our assumptions following an analyst briefing yesterday. These are the key takeaways:

• To recap, the group registered strong FY22 sales, buoyed by higher contributions from operations in livestock (+27% YoY) and feedmill (+26%) due to higher average selling prices and volumes. Better revenues were seen across all operating markets, including Malaysia (+21% YoY), Singapore (+1.4% YoY), Vietnam (+26% YoY), Indonesia (+34%) and Philippines (+97%).

• The group’s FY22 feedmill production stood at 4.2mil tonnes (+4% YoY) with an average utilisation rate of 64% (+0.4%-point). Meanwhile, sales volume of group feed climbed 4% YoY to 2.7mil tonnes.

• However, supply volume of broiler day-old chicks (DOC) increased 12% YoY to 554mil chicks, whilst broiler chicken volume rose 15% YoY to 153mil birds.

• Also, the group sold 1.7bil eggs during the year, down 6% YoY due to the avian flu in mid-2022 that affected layer birds at several of its farms in Malaysia.

• Cost-wise, operating expenses rose 26% YoY, lifted by higher cost of goods sold (+2.5%-point YoY) on heightened raw material cost and inflation. Even so, feedmill industry is a cost-plus business and we reckon LHI’s ability to pass on the extra cost to customers could partly cushion the overall impact.

• In terms of capex, LHI has kept its expenditure below RM200mil as there is still ample capacity from the previous spending. Notably, the group intends to prioritise its balance sheet as average borrowing costs have gone up from 3.5% a year ago to 5.5% in tandem with OPR hikes last year, despite borrowings remaining relatively flattish.

• Moving forward, given the full reopening of local and regional economies, we expect demand for livestock and poultry to continue being strong in FY23.

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

Source: AmInvest Research - 2 Mar 2023