Results

• Within expectation… 2QFY18 core net profit of RM12.2m (qoq: +177%; yoy: +239%) took 1HFY18 core net profit to RM16.6m (+270%), accounting for 40.7% of our full-year forecast. We consider the results within expectation, as we expect the strong earnings momentum in 2QFY18 to sustain into 2H, underpinned by higher production capacity at both the broiler and layer segments.

Deviations

• Broadly in line.

Dividend

• None.

Highlights

• QoQ & YoY… 2QFY18 core net profit rose 177.3% qoq and 238.9% yoy to RM12.2m, boosted mainly by higher contribution from integrated livestock farming segment (arising from higher egg sales volumes, higher quantity and price of processed frozen products and pasteurized liquid eggs), but partly offset by weaker retail supermarket performance and higher finance cost.

• YTD… 1HFY18 core net profit rose 270.1% to RM16.6m mainly on the back of higher contribution from integrated livestock farming segment (which saw its PBT doubling to RM23.6m from RM7.7m a year ago, arising from higher egg sales volumes, higher quantity and price of processed frozen products and pasteurized liquid eggs.

• Net debt and net gearing rose to RM185.7m and 0.64x, respectively (from RM175.8m and 0.63x), due to higher borrowings incurred for its upstream expansion plan (i.e. the broiler and layer segment).

• Upon completion we note that capacities at the layer and broiler segments will increase by two-third and 100% to 1.8m eggs/day (by end-FY18) and 2m birds/month (by end-FY19), which will then be catered for: (1) Growing demand potential for pasteurized liquid egg and function eggs; and (2) Rising demand for processed chicken products and new processed food capacity capacity from 49%-owned NHFM.

Risks

• (1) Spike in poultry feed prices; (2) Further weakness in MYR; and (3) Delay in expansion plan.

Forecasts

• Maintained.

Rating

BUY ( ↔ )

• We continue to like Lay Hong for its exciting earnings growth prospects, underpinned by its expansion plan (at the broiler, layer and pasteurized egg segments) and tie up with NH Foods (which allows Lay Hong to expand its market reach by leveraging on NH Foods’ wide geographical network).

Valuation

• Maintain BUY recommendation with unchanged SOP derived TP of RM1.24 (see Figure 3).

Source: Hong Leong Investment Bank Research - 15 Nov 2017