Summary

• To recap, Leong Hup International Bhd’s (LHI) 1Q23 core net profit rose 8.7% YoY to RM22.1m. Despite the reported earnings make up to only 10.0% of ours and consensus forecasts, we expect the recovery may take place in 2H23 given the reopening of international borders in China since January 2023 is likely to boost demand going forward. Also, the declining trend in 1H23 for the feed costs prices (soybean and maize) may provide upside potential in the earnings recovery.

• YoY, the increase of 1Q23 core net profit was driven by the feedmill segment on the back of higher ASP and higher sales volume in Vietnam and the Philippines, along with improving ASP in Indonesia. Also, better margins were noticed in Vietnam and Indonesia.

• Meanwhile, in the poultry segment YoY, higher revenue was arising from improved ASP and sales volume of DOC and eggs in Malaysia, as well as favourable sales volume of dressed chickens in Philippines.

• Feed costs. The soybean and maize prices have declined in the 1H2023 on the back of (i) ample supplies resulted from favourable weather, (ii) easing supply chain disruptions due to the calmer situation between Ukraine-Russia, coincided with (iii) stable demand. However, we observed that both the commodities prices are still elevated as compared to pre-Covid-19 levels.

• Price control mechanism. Last year, the government has maintained the price control mechanism with an increased price ceiling for chicken prices by 50 sen to RM9.40/kg. Without the floating price mechanism, the earnings for LHI may remain soft under the challenging environment.

• Outlook. Feed costs price has been on a declining trend, but remains elevated. Thus, the recovery could be on a gradual pace. Meanwhile, on the demand side, we should be expecting stable demand in tandem with the reopening of business activities overall. LHI stayed committed to allocate resources towards its downstream business, including the B2C channels such as Sunnychick Store in Indonesia and The Bakers’ Cottage in Malaysia, alongside the investments in cold-rooms.

• Nonetheless, we are ceasing coverage on LHI due to reallocation of internal resources. Our last recommendation on LHI was BUY with a fair value of RM0.97, derived by ascribing a target PER of 16.0x to its FY23f EPS of 6.0 sen.

Source: Mplus Research - 28 Jul 2023