Summary

• Leong Hup International Bhd’s (LHI) 1QFY21 net profit climbed 222.8% YoY to RM70.3m, primarily resulted from favorable average selling price (ASP) and sales volume of day-old-chicks (DOC) and broiler chickens in Indonesia and Philippines which led to better revenue and margin, coupled with the increase in ASP of broiler chickens in Malaysia, as well as emerging contribution from downstream business focus in the business-to-consumer channel since June 2020. Revenue for the quarter improved 16.9% YoY to RM1.68bn. First interim dividend of 0.66 sen per share was declared for 1QFY21.

• The net profit came in at 44.8% of our previous profit forecast of RM157.1m for FY21f and made up 40.8% of consensus expectations of RM172.4m. The healthy topline and margin growth posted in 1QFY21 underpinned by continuous volume expansion and cost management indicates that the Group is on course to stage a recovery amid improving operating environment.

• Leong Hup remained consistent in expanding capacity in existing businesses which can be translated into further economies of scales. Meanwhile, the group will continue its effort in building an integrated ecosystem in poultry chain with emphasis on downstream expansion (The Bakers Cottage) to improve margin stability amid volatile prices in the poultry market.

• Regionally, LHI plans to (i) enhance capacity and efficiency in production of aquatic feed in Vietnam operations (ii) ramp up its upstream capacities in Philippines through new GPS farm and feedmill and (iii) continue to develop downstream segment in Indonesia with an upcoming new poultry processing plant in West Java.

• Cost wise, soybean prices maintained its upward momentum in 1Q2021, climbing +22.6% QoQ owing to climate change and large demand from China. Likewise, the maize prices climbed 13.6% QoQ on the back of sharp rise in demand which led to poor availability on the market. Despite the higher feed cost, LHI has maintained their feed inventory at approximately 3-4 months.

Valuation & Recommendation

• We increased our earnings forecast to RM225.7m and RM280.9m (from 157.1m and 218.7m) for FY21f and FY22f respectively to account for the higher ASP on DOC and broiler chicken in line with a healthy result posted in 1QFY21, coupled with the lower effective tax rate at 25.2% as compared to the previous rate closed to 30.0%. We upgrade our recommendation from HOLD to BUY on LHI at target price of RM0.99.

• Our target price is based on PE of 16.0x pegged to our revised FY21f estimated EPS of 6.2 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 vertical integration along the poultry chain and its ability to grow capacities to increase domestic production volume. Moving forward, we are optimistic with the Group’s performance as the economies in the countries the Group operates in are forecasted to stage a recovery in 2021, notwithstanding a transitory setback.

• 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 approximately two months. Any drastic fluctuation in ASP of LHI’s output (DOCs and broilers) will affect bottomline margins.

Source: Mplus Research - 21 May 2021