Results Highlights

• Leong Hup’s (LHI) 4Q2019 net profit fell 9.5% Y.o.Y to RM29.5 mln, dragged down by the lower contribution from the livestock and poultry related products segment in the Malaysia, Indonesia and Singapore market. Revenue for the quarter declined marginally by 0.7% Y.o.Y to RM1.54 bln. For 2019, cumulative net profit declined 19.1% Y.o.Y to RM150.6 mln. Revenue for the year, however, expanded 5.4% Y.o.Y to RM6.05 bln.

• The reported results came below our expectations, making up to 91.8% of our net profit estimate of RM163.9 mln for 2019. The reported revenue, however, came within our expectations, amounting to 101.0% of our full-year forecast of RM6.00 bln.

• Segment wise in 4Q2019, the livestock and poultry related segment’s EBITDA slipped 23.9% Y.o.Y to RM51.0 mln, bogged down by the decrease in ASP of day old chicks (DOC) in Malaysia and Indonesia and lower ASP of processed food in Singapore. The feedmill segment’s pretax profit, however, gained 9.7% Y.o.Y to RM96.9 mln due to increase sales in Malaysia and Vietnam, which the latter was boosted by the with the contribution from Dong Nai feedmill plant in Vietnam that commenced operations in January 2019. Geographically, Malaysia accounted to RM411.3 mln or 26.7% of total revenue, while overseas contribution amounted to RM1.13 bln or 73.3% of the group’s total revenue of RM1.54 bln in 4Q2019.

• As of 2019, LHI’s gearing stood at 114.7% (up from 86.8% recorded in 3Q2019). Moving forward, we expect LHI’s gearing level to remain elevated as the group will hinge on external funding to cater for its overseas expansion.

Prospects

Moving into 2020, we expect overseas operations will continue to anchor earnings growth, particularly in Vietnam and Philippines, coupled with the penetration into the Myanmar market following the recent setting up of a subsidiary in the aforementioned country.

On the local front, the stabilising in chicken and chicken eggs prices bodes well for the group. We expect prices to remain stable in view of the gradual rising demand, coupled with the rising production.

In the meantime, the downward bias feed prices (soybean and corn) will provide some support to its margins. In 4Q2019, soybean prices fell 1.8% Y.o.Y to an average US$934/bushel, whilst corn prices declined 4.9% Y.o.Y to an average US$389/bushel. (see Appendix 1)

With the reported earnings coming below our expectations, we trimmed our earnings forecast by 11.0% and 7.0% to RM173.6 mln and RM192.0 mln for 2020 and 2021 respectively, to reflect the steeper-than-expected decrease in ASP of chicken and chicken eggs in Indonesia and Malaysia.

Valuation And Recommendation

We maintain our HOLD recommendation on LHI, but with a lower fair value of RM0.81 (from RM0.93) as we assigned an unchanged target PER of 17.0x to our revised 2020 estimated EPS of 4.8 sen. The assigned target PER represents a 20.0% discount to its local and regional peers’ average of 21.5x, after taking into account of the larger market capitalisation of its peers like Charoen Pokphand Foods PLC and ThaiFoods Group PLC in Thailand, JAPFA Ltd in Singapore, and QL Resources Bhd in Malaysia.

Despite the volatile chicken and chicken eggs prices, we continue to like LHI for its position as one of the largest pure-play, vertically integrated poultry player with strong presence in the ASEAN region. We are also positive on the group’s expansion plans on ramping up the poultry and feedmill production, particularly in Vietnam, as it is one of the fastest-growing markets in the ASEAN region.

Risks to our recommendation and forecast include fluctuations in raw material prices (corn and soybean) that could impact LHI’s margins. LHI purchases raw materials 1-3 months ahead and stocks are kept for approximately two months. Any drastic fluctuation in ASP of LHI’s output (DOCs and broilers) will affect bottomline margins.

Source: Mplus Research - 19 Feb 2020