Summary

• Leong Hup International Bhd’s (LHI) 2Q22 core net profit improved 32.8% YoY to RM40.5m. 6M22 core net profit, however, declined 39.6% YoY to RM60.9m as the group’s margin was hit by elevated feed cost driven by the Russia-Ukraine conflict. Nevertheless, the results came in above expectations, amounting to 66.3% of our previous full year forecast of RM91.8m and 53.2% of consensus forecast of RM114.5m. Key deviations were mainly due to a higher-than-expected contribution from all operating countries in the current quarter.

• YoY, the bottomline improved due to higher ASP and sales volume of broiler chickens in Vietnam, Indonesia, and Philippines, higher ASP and sales volume of eggs in Vietnam and Malaysia, and increased contribution from processed food in Singapore. Meanwhile, the feedmill segment registered better margin from higher selling price and sales volume in Indonesia, higher selling price in Vietnam, and volume growth from Philippines.

• QoQ, the net profit growth was in line with a higher revenue in the current quarter underpinned by (i) higher average selling price (ASP) and sales volume of broiler chickens in Vietnam, and (ii) higher ASP of livestock feed in Vietnam and Indonesia.

• Cost wise, both soybean and maize prices trended higher QoQ, driven by the supply disruptions due to Russia-Ukraine conflict, global fertiliser price hike as well as increased freight cost. The increase in cost, however, has been partially cushioned by a higher revenue amid economic recovery. We expect the soybean and maize prices to remain steady over the near term, barring any drought-driven shortages.

• As Covid-19 becomes endemic, all the countries that LHI operates in have seen revenue growth in 6M22 as compared to 6M21 due to improved demand amid resumption of economic activities. Nevertheless, high feed costs and the attempts by governments to manage food inflation via price control scheme may continue to create uncertainties for the group’s performance moving forward.

• We believe LHI’s future growth will be driven by ongoing expansion in hatchery and feedmill in Philippines, as well as upcoming raw material drying facility and poultry processing plant in Indonesia. For Malaysia, LHI remained committed to its downstream expansion plan across Baker’s Cottage outlets.

Valuation & Recommendation

• As the reported earnings came in above our expectations, we upgrade our FY22f and FY23f earnings forecast by 31.5% and 18.9% to RM120.7m and RM165.2m respectively. The earnings forecast takes into account the improved demand in all LHI’s operating countries which will result in a higher selling price and volume growth moving forward.

• We upgrade LHI to HOLD (from SELL) with a revised target price of RM0.53 (from RM0.40). The target price is derived by ascribing a target PER of 16.0x to its FY22f EPS of 3.3 sen.

• Risks to our recommendation and forecast include the volatility of commodity prices. Any supply shortage caused by drought will drive the commodity prices and lead to margin compression for the group. Besides, the group faces uncertainties arising from the government’s intervention to set a ceiling price on poultry products.

Source: Mplus Research - 1 Sept 2022