Summary

• Leong Hup International Bhd’s (LHI) 1Q23 core net profit rose 8.7% YoY to RM22.1m. The reported earnings make up to 10.0% of ours and consensus forecasts of RM220.5m and RM221.5m. However, we believe the core net profit is within expectation and expect to be back loaded amid the declining trend in feed costs prices (soybean and maize).

• YoY, the increase in core net profit was predominantly driven by the feedmill segment, benefiting from increased revenue on the back of higher average selling price (ASP) and sales volume in Vietnam and the Philippines, along with improved ASP in Indonesia. Notably, Vietnam and Indonesia saw better margins.

• The poultry segment saw higher revenue (+4.1% YoY) arising from higher ASP and sales volume of DOC and eggs in Malaysia, as well as favourable sales volume of dressed chickens in Philippines. Nevertheless, EBITDA declined 83.0% YoY for the segment due to margin compression stemming from elevated feed costs coupled with lower ASP of DOC in Indonesia.

• QoQ, core net profit plunged 75.6% mainly due to (i) lower ASP and sales volume of broiler chicken and lower sales volume of livestock feed in Vietnam, and (ii) lower ASP and sales volume of livestock feed and lower sales volume of broiler chickens in Malaysia.

• Cost wise, the prices of soybean and maize declined throughout 1Q23 on the back of (i) ample supplies resulted from favourable weather in growing regions, (ii) easing supply chain disruptions due to the calmer situation in Ukraine, coincided with (iii) expectations of stable demand. Nevertheless, both the commodities prices remained elevated as compared to pre-Covid-19 pandemic.

• Despite the challenges in global economy due to heightened inflation, LHI benefits from its operations situated in the robust ASEAN region. The group remained committed to allocate resources towards its downstream business, including B2C channels such as Sunnychick Store in Indonesia and The Bakers’ Cottage in Malaysia, alongside investments in coldrooms.

Valuation & Recommendation

• Given the reported earnings are deemed within expectations, we keep our FY23f and  FY24f earnings forecast unchanged at RM220.5m and RM234.3m respectively,  taking into account the anticipation of sustained downward trajectory in  commodities prices, which is expected to propel the group’s margin.

• We maintained our BUY recommendation on LHI with an unchanged target price of  RM0.97. 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 or supply chain disruption  may drive up commodity prices, resulting in margin compression for the group.  Besides, the group may face additional uncertainties arising from the government’s  efforts to regulate food inflation.

Source: Mplus Research - 1 Jun 2023