Summary

• Leong Hup International Bhd’s (LHI) 1Q22 net profit plunged -71.0% YoY to RM20.4m. The results came in below expectations, amounting to 14.5% of our previous full year forecast at RM140.7m and 12.3% of consensus forecast at RM166.1m. Key deviation was due to margin compression arising from the elevated feed costs mainly driven by the Russia-Ukraine conflicts.

• QoQ, core net profit declined -46.4% despite a 15.1% increase in revenue to RM2.09bn contributed from a higher sales volume and ASP of broiler chicken and DOC, as well as a higher sales volume of livestock feed in Indonesia. The lower profit was mainly due to an increase in feed costs that outpaced revision in ASP.

• Cost wise, soybean and maize prices saw spike in 1Q22, rising 24.3% and 12.9% respectively QoQ. Key drivers include: (i) the inflation-driven farming costs, (ii) tightened global supply due to a drought in Brazil that delayed harvesting, and (iii) unresolved Russia-Ukraine tension. The commodity prices may continue to stay elevated due to prolong Russia-Ukraine conflicts, which is likely to continue through the following quarters.

• Geographical wise, 1Q22 saw LHI’s revenue increased YoY in all its operating countries amid business recoveries and cost-push inflation. Despite recording higher revenue, all the operating countries’ EBITDA declined YoY except for Malaysia.

• Moving forward, we believe the demand for poultry products should remain robust amid recovery in economic activities supported by continued progress of booster shots rollout. However, the industry may continue to face uncertainties stemming from supply chain disruptions and government’s attempts to manage food inflation. Such measures include the price control scheme implemented on chicken and egg effective until 5th June 2022 and the chicken exports ban from 1st June 2022.

• LHI remained committed on the volume expansion and downstream integration. As of 31st March 2022, the group operates 184 outlets under The Baker’s Cottage restaurants chain, with a goal of reaching 200 outlets by end of 2022. Meanwhile, LHI’s upcoming projects include expansion of broiler farms in Malaysia, silo expansion in Vietnam, and construction of new PS farm in Philippines.

Valuation & Recommendation

• As the reported earnings came in below our expectations, we trimmed our FY22f and FY23f earnings forecast by 34.8% and 18.5% to RM91.8m and RM138.9m respectively. The earnings forecast takes into account the elevated feed costs which is may pressure LHI’s margin going forward.

• We downgrade LHI to SELL (from BUY) with a revised target price of RM0.40 (from RM0.62). Our target price is derived by ascribing a target PER of 16.0x to its FY22f EPS of 2.5 sen.

• Risks to our recommendation and forecast include the prolonged supply chain disruption arising from the hike in commodity prices. Besides, the group is vulnerable to the risk of selling price volatility, which is subject to market supply and demand as well as the government’s price control scheme.

Source: Mplus Research - 25 May 2022