Highlights

• We walked away from our recent small group meeting with Lay Hong, feeling positive about its outlook.

• A beneficiary of stronger MYR… As lower revenue proceeds (mainly from exports of eggs and pasteurized eggs) will be more than mitigated by lower feed costs (mainly soybean and corn meals). We estimate that every RM0.10 strengthening in MYR (against the US$) will lift Lay Hong’s FY18-19 core net profit by 4.3% and 3.9%.

• Capacity at pasteurized liquid egg segment to double…

To cater to the rising demand potential for pasteurized liquid eggs. Upon completion (expected by Sep-18), the new production facilities will double to 1,000 mt/month.

• Most expansion plans on track… Capacity expansions at the downstream food processing (via 49% owned JV unit NFHM) and layer segments are on track for completion. Upon completion (expected by end-FY18 for layer segment and end-1HFY19 for new downstream processing plant), capacity at the layer segment will increase by two-third to 3m eggs/day, while new capacity at the downstream food processing plant will more than double Lay Hong’s current capacity (by 167%) to 3,200 mt/month.

• …but broiler expansion is slightly behind our projection… due mainly to the unexpected delay in obtaining regulatory approvals from relevant authorities.

• Net gearing to reduce post FY18… We estimate that Lay Hong’s net gearing will remain high at ~0.65x in FY18 before reducing to less than 0.5x in FY19, given its ongoing capex plans (RM100m in FY18 and RM50m in FY19).

• Divestment of retail arm to reduce net gearing further (if it materializes)… Lay Hong may divest its remaining 70% stake in the retail arm, to better focus at its bread and butter (i.e. integrated livestock farming business). The disposal of the retail arm (if materializes), will ease Lay Hong’s net gearing position (albeit marginally).

Risks

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

Forecasts

• We lower our FY03/18 core net profit forecast by 7% to RM37.9m, mainly to account for slower capacity expansion at the broiler segment. Maintain FY03/19-20 core net profit forecasts.

Rating

BUY ↔

• We like Lay Hong for its exciting earnings growth prospects, underpinned by its expansion plan (at the upstream segment) 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 with unchanged SOP-derived TP of RM1.24.

Source: Hong Leong Investment Bank Research - 6 Feb 2018