Investment Highlights

• We reiterate BUY call on Leong Hup International (LHI) with a unchanged fair value of RM0.95/share, pegged to FY24F P/E 11x, in line with its 3-year mean. We make no adjustment to o neutral ESG rating of 3 stars.
   
• Our forecasts are maintained following the analyst briefin yesterday. These are the salient highlights:
   
  • Management is confident of 3QFY24 earnings delivery aft registering 1HFY24 earnings of RM153mil, which accounts f 49% of our FY24F earnings and 51% of street’s.
     
  • Inflation has moderated as corn prices slid to US$3.66/bush from the YTD high of US$4.76/bushel on 13 Jun this year wi soybean meal to US$3.11/bushel from US$3.53/bushel on May 2024. This supports near-term group margin prospec given that the feedmill segment accounts for 51% of 2QFY2 EBITDA. This caused the cost of goods sold to drop to 70.6 of revenue in 2QFY24 vs. 77.3% in 2QFY23.
     
  • Nevertheless, management cautions on margin directio going forward given that the group is likely to pass on co savings to customers amid volatility of commodity prices an the direction of USD=MYR exchange rate.
     
  • 2QFY24 group revenue slid 2.4% YoY to RM2.4bil mainly du to sales contraction in Vietnam (-17%), Singapore (-2.8%) an Malaysia (-2.7%) due to lower feedmill revenue in tandem wi a moderation in raw material costs. This was partly offset b higher sales to Philippines (+19%) and Indonesia (+3.3%).
     
  • However, 2QFY24 EBITDA rose 24% YoY to RM296mil due Indonesia, which surged 7.8x, Philippines +73% and Vietna +61%, partly offset by Malaysia (-17%) and Singapore (-27%) o lower revenues.
     
  • The group’s feedmill utilisation slid to 58.7% in 2QFY24 fro 60.8% in 2QFY23 mainly due to a slight 2.78% capaci expansion to 1.1mil MT with a second pelleting line in th Philippines, exacerbated by a slight 0.8% YoY group sale volume decline to 647.8k MT.
     
  • YoY, 2QFY24 group volumes improved, rising 3.4% to 145.3m broiler day-old-chicks, +11.6% to 46.2mil chickens and +13.6 to 507mil eggs, underpinned by higher regional demand.
     
  • With gross cash of RM637mil as at 30 Jun 2024 despite a n gearing of 71%, the group has a FY24F capex target RM300mil.This include: i) a waste water treatment plant inWest Java & outlet expansions for Sunny’chick Stores inIndonesia, ii) RM18mil slaughtering plant & RM9mil new egg rading machine in Yong Peng, Malaysia, and iii) RM13milTarlac feedmill warehouse & LH Deli outlets in the Philippines.
     
• We remain positive on LHI premised on: 
  
  (i) expectation that the group could continue gaining market share from smaller players exiting the business due to elevatedoperational costs,

    (ii) gradual increase in revenue from an expansion in production capacities to supply more poultry to Indonesia and Philippines, and

   (iii) stabilising EBITDA margins due to easing of major raw material cost (corn and soybeans meal).

• The stock currently trades at a compelling FY24F PE of 6x, below its 3-year average of 11x while offering a fair dividend yield of 4%.

Source: AmInvest Research - 29 Aug 2024