MIDF Research keeps 'buy' call on Leong Hup, trims target price to 90 sen

KUALA LUMPUR (Nov 30): MIDF Research maintained its “buy” recommendation on Leong Hup International Bhd, but trimmed its target price (TP) to 90 sen, from RM1.05 previously.

The price cut came after MIDF Research downgraded its earnings projections for the integrated producer of poultry, eggs and livestock feed.

Post analyst briefing, the research house revised downward its earnings projections for the financial year ending Dec 31, 2023 (FY2023) to FY2025.

It lowered its earnings forecasts for Leong Hup by 13.5% for FY2023, 17.2% for FY2024 and 23.2% for FY2025.

Hence, MIDF Research is now anticipating Leong Hup to post an annual net profit of RM387.5 million for FY2023, which is still better compared to RM218.89 million in FY2022.

It also expects the group to deliver an annual net profit of RM389.8 million for FY2024 and grow further to RM419.2 million for FY2025.

“This adjustment was made after considering a slight decrease in demand from Vietnam, influenced by multiple headwinds that more than offset tighter supplies, normalisation of the gross profit margin to FY2021 levels, attributed to the decline in global commodities from their two-year peak, anticipated higher labour costs due to the expectation of an increased workforce following business expansion, and higher capital expenditures aligning with the group's guidance of RM250 to 300 million for FY2023-FY2024,” said the research outfit.

Despite facing multiple headwinds, MIDF Research is positive about Leong Hup’s FY2024 outlook, underpinned by the staple food nature of its product indicating resilient demand, the normalisation of margins in its Malaysian operations due to the removal of price controls for chicken, and the global softening of commodity prices for chicken feed, thereby improving the margin for the livestock segment.

“We are also optimistic about a more favourable operating environment in Indonesia, where supplies have normalised following government initiatives to manage market demand and supply, allowing the company to increase selling prices with better margins.

“Also, given the persistent shortage of day-old chicks (DOCs) and eggs worldwide, we believe that Leong Hup is well-positioned to meet unmet demand, thanks to its strong regional production capacity,” it added.

In terms of margin outlook, the research house opined that the operating profit margin of 10.7% achieved in the third quarter ended Sept 30, 2023 (3QFY2023) could not sustain as it believes the margin may normalise in the 4QFY2023 and FY2024, given the poultry industry’s vulnerability to market-driven supply and demand dynamics.

“In particular, we gather that the recession fears in European countries have led to permanent or temporary shutdowns of factories in Vietnam, resulting in job losses and decreased demand for poultry products. In Malaysia, the removal of chicken subsidies has not fully translated to higher selling prices for live birds, primarily due to reduced local demand,” the research note read.

However, on a positive note, MIDF Research expects a better margin in 4QFY2023 as compared to 2QFY2023 (rather than the extraordinary 3QFY2023 margin). This is primarily attributed to the anticipation of a greater ability to offer higher selling prices for DOCs in Malaysia and Indonesia, driven by shortages of great-grandparent DOCs that are not expected to normalise for at least the next two years.

“Additionally, the decline in feed input prices for corn and soybean from the peak levels in Feb/Mar is expected to persist, keeping costs relatively lower for 4QFY2023 onward compared to 2QFY2023 and 1QFY2023,” it added.

To recap, Leong Hup saw its 3QFY2023 net profit rise 97.5% to RM132.96 million from RM67.31 million a year earlier, on better margin from higher selling prices of DOCs and eggs in Malaysia, and DOCs in Indonesia.

Quarterly revenue also rose 6.6% to RM2.52 billion in 3QFY2023 from RM2.36 billion a year earlier, on higher selling price and sales volume of broiler chickens and higher selling price of DOCs in Indonesia, higher selling price and sales volume of eggs and DOCs in Malaysia, higher sales volume of dressed chickens in Philippines and higher sales volume of fresh chickens in Singapore.

The strong quarterly performance lifted Leong Hup's net profit for the cumulative nine months ended Sept 30, 2023 (9MFY2023) by 71.7% to RM220.14 million from RM128.19 million a year earlier, while revenue grew 6% to RM7.13 billion in 9MFY2023 from RM6.72 billion in 9MFY2022.

The group declared an interim dividend of 1.2 sen per share for FY2023, payable on Jan 29, 2024.

At noon break on Thursday (Nov 30), Leong Hup shares were down 1.5 sen or 2.21% at 66.5 sen, giving the group a market capitalisation of RM2.43 billion. Some 3.2 million shares have been traded so far.

Year-to-date, the stock has gained 33%.

According to Bloomberg, four analysts have "buy" calls for Leong Hup while two have "hold" calls, with a 12-month TP of 85 sen, implying an upside of 28% from its current share price.

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Leong Hup's 3Q net profit jumps 98%, declares 1.2 sen dividend