Investment Highlights

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

• We deem LHI’s 1HFY23 earnings of RM87mil as within our expectations, reflecting 40% of our full-year estimate, albeit 55% of consensus forecast. We expect 2HFY23 earnings to be sequentially stronger due to demand recovery and improving margins from Indonesia, which contributed 37% of 1HFY23 total revenue. Hence, we made no changes to our FY23F-FY25F earnings.

• YoY, 1HFY23 revenue improved by 6% on the back of higher contribution from: (i) poultry & livestock operation (+4%) mainly from higher average selling price (ASP) and sales volume of day-old-chicks (DOC)/eggs in Malaysia, (ii) sales volume increase of dressed chickens in Phlippines, and (iii) feedmill segment (+8%) from higher ASP and volume in Vietnam and Philippines as well as higher selling prices in Indonesia.

• However, 1HFY23 EBITDA for livestock & poultry declined marginally by 1% YoY due to elevated raw material costs resulting in margin compression of 0.2%-point. Whereas feedmill EBITDA improved by 50% YoY, contributed by better margin from higher ASP from Vietnam, Indonesia and Philippines. Overall, 1HFY23 earnings improved by 43% to RM87mil as EBITDA margin improved 1.9%-points to 8.5%.

• QoQ, 2QFY23 revenue increased by 10% thanks to (i) poultry and livestock segment (+10%) which benefited from higher ASP and volume of DOC and increased broiler chicken prices in Indonesia, (ii) higher ASP and broiler chicken volume in Vietnam, and (iii) 10% feedmill increase mainly from higher ASP and volume in Indonesia and Vietnam. Overall, 2QFY23 net profit surged 2.2x QoQ thanks to better margins from higher ASP in Indonesia, which registered a positive EBITDA of RM51mil from a loss of RM28mil.

• Moving forward, management expects demand recovery for the livestock & poultry in Indonesia and Singapore, along with sustained demand in Malaysia. However, we acknowledge softer demand in Vietnam due to potential disposal income constraints caused by high cost of living.

• On the bright side, we expect stability in the feedmill segment given easing feed costs. Notably, soybean prices have fallen by 11% to US$1,381/bushel, and corn prices have dropped by a significant 30% to US$477/bushel since their peaks in February 2023, according to Trading Economics Commodities data.

• The Group Currently Trades at a Compelling FY23F PE of 9x, Half of Its 3-year Average of 18x.

Source: AmInvest Research - 30 Aug 2023