Investment Highlights

• We reiterate our BUY call on Leong Hup International (LHI) with an unchanged fair value of RM0.79/share pegging the stock to a rolled-forward FY24F PE of 11x, in line with its 3- year mean. This also reflects an unchanged neutral ESG rating of 3-star.

• The company expects a recovery in demand for livestock & poultry from Indonesia and Vietnam in 2HFY23 compared to 1HFY23. Recall in 2QFY23, demand for broiler day-old chicks (DOCs) in Indonesia and chickens in Vietnam rose QoQ.

• With the recovery of sales volume for livestock in Indonesia and Vietnam, we forecast an improved revenue contribution from all countries (Malaysia, Philippine and Singapore) in 2HFY23. We gather that its projects - the boiler farm in Indonesia and parent stock (PS) farm in Philippines - to expand production capacities have been recently completed (Exhibit 3).

• On its livestock and poultry operations in Vietnam, dynamics have recently improved compared to 2QFY23, underpinned by: (i) a gain in market share from smaller players exiting the business due to elevated operational cost, and (ii) the ability to adjust for higher average selling prices from tight supplies of broiler chickens.

• Soybean meal prices have fallen by 27% to US$370/mt while corn prices have dropped by a significant 29% to US$486/bushel from peaks in February 2023, based on Bloomberg data. We expect the trend for prices to continue being volatile but in a narrow range of fluctuation in 2HFY23 compared to 1HFY23.

• Management guided that its overall feedmill plant utilisation rate has improved to 65% currently from 60% in 2QFY22. Hence, we expect better margins from the feedmill segment in 3QFY23 on easing feed cost. Also, the improved margins will be contributed by the lag time in downward revision in average selling prices to the lower feed cost.

• The 2nd feedmill pelleting line with a capex requirement of RM4mil is targeted to be completed by 3QFY23 in Philippines. Upon completion, the monthly capacity for producing its own feedmill will be doubled from 14k mt to 28k mt. We believe that it will help to improve production efficiency by streamlining the process, resulting in better margins in FY24F.

• Despite the shortfall in 1HFY23, we expect earnings to improve in 2HFY23F, underpinned by: (i) better EBITDA margin from the feedmill segment due to easing raw material cost, and (ii) demand recovery in Indonesia and Vietnam from 1HFY23.

• The stock currently trades at a compelling FY24F PE of 7x, below its 3-year average of 11x.

Source: AmInvest Research - 5 Oct 2023