Investment Highlights

• We keep BUY call on Leong Hup International with a lower fair value of RM0.79/share (from RM0.93/share previously) based on FY23F PE of 13x, 1 SD lower than its 3-year mean. This also reflects an unchanged neutral ESG rating of 3 stars.

• We cut our FY23F/FY24F/FY25F earnings by 12%/9%/8% after 1QFY23 net profit of RM22mil missed our expectations, accounting for only 9% - 10% of our previous full-year and consensus estimates. The negative variance was due to a lower-than-expected margin that was eroded by higher feed cost. Nevertheless, we make no changes to FY23F–FY25F revenues as 1QFY23 revenue met our expectations at 22% and 25% of the street’s.

• YoY, 1QFY23 revenue increased by 5% backed by higher contributions from: 1) poultry & livestock operation (+4%) mainly from Malaysia and Philippines on better sales volume and selling prices, and 2) feedmill business (+7%) buoyed by higher average selling price and sales volume among Vietnam, Philippines, and Indonesia.

• However, poultry & livestock EBITDA deteriorated by 83% YoY due to elevated input costs of feed as well as lower selling price in Indonesia, whereas EBITDA from feed mill business grew by 48% YoY, contributed by better margin from higher selling prices in Vietnam and Indonesia. Consequently, group earnings improved by 9% YoY, partly supported by RM29mil subsidies from Malaysian government.

• QoQ, 1QFY23 topline dipped 5%, largely affected by lower selling price and volume of broiler chickens coupled with reduced livestock feed in Vietnam and Malaysia. Nonetheless, earnings plunged by 76% QoQ owing to lower EBITDA from poultry & livestock (-94% QoQ) on higher feed cost, alongside a higher effective tax rate (+19.8%-point).

• The high import cost of chicken feed has crimped its 1Q performance, but we take note that feed cost has started to decrease as U.S. organic corn feed price has come off from US$11.54/bushel in late February 2023 to US$10.17/bushel (- 12%). Meanwhile, soybean price have declined by 16% from US$1,519/bushel in late April to US$1,277/bushel. Recall that corn and soybean are the main ingredients for chicken feed.

• Hence, subsequent quarters could improve gradually, further supported by incoming subsidies that the group has yet to receive and recognise, in our view.

• The group currently trades at a compelling FY23F PE of 9x, half of its 3-year average of 18x.

Source: AmInvest Research - 1 Jun 2023