Summary

• Leong Hup International Bhd’s (LHI) 4Q22 core net profit jumped 138.8% YoY to RM90.7m, bringing a significant 156.3% surge in 12M22 core net profit to RM218.9m. The results came in above expectations, amounting to 122.3% of our full year forecast of RM179.0m. Key deviations were primarily due to a higher contribution from both the poultry and feedmill segments.

• YoY, the bottomline rocketed as revenue from the poultry segment increased mainly due to (i) higher sales volume of DOC in Malaysia and Indonesia, (ii) higher average selling price (ASP) and sales volume of broiler chickens and eggs in Vietnam, and (iii) subsidies from Malaysia’s government on livestock of RM24.9m. Besides, higher contribution from the feedmill segment was primarily attributed to higher ASP and sales volume in Indonesia and Vietnam.

• QoQ, revenue fell 1.7% to RM2.32bn, mainly due to (i) lower ASP and sales volume of DOC and lower ASP of livestock feed Indonesia and (ii) lower ASP and sales volume of broiler chicken in Vietnam, but was cushioned by better sales volume of broiler chickens and DOC in Malaysia. Despite the lower revenue, core net profit improved 34.8% YoY due to better margin from both the poultry and feedmill segments.

• Cost wise, the prices of soybean meal and maize remained elevated in 4Q22 amid market’s irregular supply and demand dynamics. We anticipate the commodities prices will continue to fluctuate amid ongoing conflicts in Ukraine.

• On a side note, Leong Hup Feedmill Malaysia Sdn. Bhd. (LFM), a wholly-owned subsidiary of the group had on 31st January 2023 filed its written representations with the MyCC pertaining to the notice of proposed decision issued by the MyCC, premised on the allegation that LFM has engaged in agreements and/or concerted practices to fix the quantum of poultry. Further announcement will be made when there is material development.

• Moving forward, we expect a higher consumption of LHI’s products amid stronger regional economies. Nevertheless, the high cost of raw materials and the attempts by governments to manage inflation may continue to create uncertainties on the group’s performance.

Valuation & Recommendation

• As the reported earnings came in above our expectations, we upgrade our FY22f and FY23f earnings forecast by 13.7% to RM220.5m. Meanwhile, FY24f earnings forecast was introduced at RM234.3m. The earnings forecast takes into account the rising demand in all LHI’s operating countries for both poultry and feedmill segments.

• We maintained our BUY recommendation on LHI with a revised target price of RM0.97 (from RM0.85). The target price is derived by ascribing a target PER of 16.0x to its FY23f EPS of 6.0 sen.

• Risks to our recommendation and forecast include the volatility of raw material commodity prices. Any draught-driven supply shortage will increase the commodity prices and lead to margin compression for the group. Besides, the group may face further uncertainties arising from the government’s attempts to manage food inflation.

Source: Mplus Research - 1 Mar 2023