Investment Highlights

• We reiterate BUY call on Leong Hup International (LHI) with a higher fair value of RM0.95/share (from RM0.79/share previously) on revised earnings expectations, pegged to an unchanged FY24F P/E of 11x, in line with its 3-year mean. We make no adjustment to our neutral ESG rating of 3-star.

• We increase FY23F-FY25F net profit by 9%-35% to account for better margins assumption from lower raw material cost and operation efficiencies in Indonesia, Vietnam and Philippine. 9MFY23 earnings of RM220mil came in way above expectation – already 100% of our earlier forecast and 113% of consensus. As a comparison, 9MFY22 accounted for only 58% of FY22 net profit.

• YoY, 9MFY23 revenue improved by 6% on the back of higher contribution from: (i) livestock & poultry operation (+5%) mainly on higher average selling price (ASP) and sales volume of day-old-chicks (DOC)/eggs in Malaysia, dressed chickens in the Philippines and boiler chickens in Indonesia, and (ii) improved feedmill operation (+8%) due to higher ASP and volume in Indonesia, Philippine and Vietnam.

• 9MFY23 core net profit increased by 72% YoY in tandem with a 49% EBITDA growth, thanks to better margins from livestock & poultry (+42% YoY) and feedmill (+49% YoY) segments. This is due to better margin from higher ASP of DOC/eggs in Malaysia and DOC in Indonesia.

• QoQ, 3QFY23 revenue increased by 4% thanks to better contribution from (i) livestock & poultry (+4%) and (ii) feedmill (+5%) from Indonesian and Malaysian markets. 3QFY23 net profit doubled to RM133mil, thanks to higher ASP of DOC in Indonesia and boiler chicken in Vietnam, in which EBITDA margin improved 6%-points for both operations in Indonesia and Vietnam.

• Moving forwards, we expect earnings to continue growing, underpinned by: (i) better EBITDA margin from feedmill segment due to easing of its major raw material cost, and (ii) gaining market share amid resilient demand in Indonesia and Vietnam.

• LHI’s major raw material, corn prices have fallen by 33% to USD456/bushel from the peak in April 2023, while soybean meal prices declined by 3% YTD to USD464/mt, based on Bloomberg data. We expect the trend for prices to continue being volatile but in a narrow range in 1HFY24. We believe that LHI will be able to pass through most of its raw material costs after the government’s removal of price controls on chicken.

• The stock currently trades at a compelling FY24F PE of 8x, below its 3-year average of 11x.

Source: AmInvest Research - 29 Nov 2023