Summary

• Leong Hup International Bhd’s (LHI) 2QFY20 net profit rose 1.1% YoY to RM16.3m, mainly lifted by the better margins from Vietnam from the higher production and average selling prices of livestock feedmill segment. Revenue for the quarter, however, declined 3.5% YoY to RM1.43bn. For 1HFY20, cumulative net profit slipped 50.4% YoY to RM38.1m. Revenue for the period decreased 4.2% YoY to RM2.86bn. An interim dividend of 0.55 sen per share, payable on 30th September 2020 was declared.

• The reported results make up to 28.0% of our net profit estimate of RM135.8m for FY20f and 26.6% of consensus expectations of RM143.3m. The reported revenue amounted to 46.7% of our full-year forecast of RM6.12bn and 47.6% of consensus forecast of RM6.00bn. The bottomline variance is mainly due to the lower ASP of DOC in Indonesia and lower contribution from the sales volume of fresh chickens and duck in Singapore.

• The expansion of downstream segment (The Bakers Cottage) will provide some stability should broiler prices were to trend lower. Demand is expected to remain sound on the back of the relatively cheaper selling prices as oppose to their peers in the F&B space. At the same time, we reckon that the improvement from feedmill segment will cushion any weakness from the livestock segment.

• Regionally, LHI plans to (i) strengthen their ready-to-eat (RTE) and ready-to-cook (RTC) products in Singapore market, (ii) improve production of aquatic feed in Vietnam operations and (iii) capitalise on the stability of poultry prices stemmed by the Indonesia’s government effort to enforce aggressive culling activities and improve feed volume to capture additional market share.

• Cost wise, soybean prices edged lower in 2Q2020, falling -4.4% QoQ owing to the Covid-19 pandemic that affected business activities across the globe. Likewise, maize prices was softer, declining -4.1% QoQ, reflecting the dour demand. Despite the lower feed cost, LHI has maintained their feed inventory at approximately 3-4 months as demand has yet to recover towards pre-Covid-19 level.

Valuation & Recommendation

• We made no changes to our earnings forecast as we reckon that ASP would improve in subsequent quarters owing to the recovery in demand due to the higher consumer spending in recent months. Hence, we maintain our HOLD recommendation on LHI, with a target price of RM0.81. Although its share price has surpassed our fundamentals marginally, we reckon that a re-rating is in the cards should the recovery in ASPs exceed expectations.

• Our target price is based on PE of 16.0x pegged to our FY21f estimated EPS of 5.0 sen. The assigned PE represents a 20.0% discount to its local and regional peers’ average of 20.0x, 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. 

• Risks to our recommendation and forecast include fluctuations in raw material prices 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 - 26 Aug 2020