Summary

• Leong Hup International Bhd’s (LHI) 3QFY20 net profit dropped 49.2% YoY to RM22.5m, mainly dragged by the slower sales volume of fresh chickens and ducks in Singapore, coupled with a lower sales volume and average selling prices (ASP) of DOC in Indonesia and Malaysia due to the Covid-19 pandemic. Revenue for the quarter, however, improved 3.0% YoY to RM1.57bn. For 9MFY20, cumulative net profit slipped 49.9% YoY to RM60.6m. Revenue for the period declined 1.7% YoY to RM4.43bn. No dividend was declared for 3QFY20.

• The reported results make up to 44.6% of our net profit estimate of RM135.8m for FY20f and 42.3% of consensus expectations of RM143.3m. The reported revenue amounted to 72.4% of our full-year forecast of RM6.12bn and 73.9% of consensus forecast of RM6.00bn. The key variance is mainly due to margin contraction following the lower ASP of eggs and DOC in Leong Hup’s global markets.

• Leong Hup remained consistent on the expansion of downstream segment (The Bakers Cottage) amid gradual economic recovery to improve margin stability, targeting 150 outlets in the year end. Meanwhile, we see overall growth in group sales volume across its main products as a sign of recovery from the previous quarter. The improvement from feedmill segment is also expected to 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 moved higher in 3Q2020, climbing +8.4% QoQ owing to the brisk export demand coupled with dry weather conditions in the US Midwest. Likewise, maize prices were up, rising +6.6% QoQ, reflecting the increased 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 slashed our earnings forecast by 44.2% and 14.5% to RM75.8m and RM156.3m for FY20f and FY21f respectively to account for the margins compression due to the lower ASP, coupled with the higher effective tax rate at 30.0% vs. our previous assumption at 25.0%. Despite that, we maintain our HOLD recommendation on LHI, but with a lower target price of RM0.69 (from RM0.81).

• Our target price is based on PE of 16.0x pegged to revised our FY21f estimated EPS of 4.3 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.

• We like Leong Hup for its strategic objectives to enhance integration along the poultry chain and its ability to grow capacities to increase domestic production volume. However, 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 around two months. Any drastic fluctuation in ASP of LHI’s output (DOCs and broilers) will affect bottomline margins.

Source: Mplus Research - 25 Nov 2020