We like the synergistic JV between Lay Hong-NH Foods, which allow Lay Hong to expand its market reach by leveraging on NH Foods’ wide geographical network. Also, the rollout of new products will be able to capture new market share. With the climactic volumes accompanied by the bullish Harami candle, we believe the downside risk could be limited. Resistance will be located around RM0.81-0.87. Support will be set around RM0.73-0.745.

Fully integrated livestock player. Lay Hong is one of the leading fully-integrated livestock farming players in Malaysia. Bulk of the output from upstream segments (i.e. layer and broiler) will be processed into valued-added products (such as processed downstream food products, liquid eggs and functional eggs), which enjoy better profitability and less volatile selling prices vis-à-vis generic poultry products.

Strong FY18 core net profit. FY18 core profit more than doubled to RM38.2m (from RM18.2m in FY17) on the back of higher contribution from integrated livestock farming segment (arising from higher egg sales volumes, higher quantity and price of processed frozen products and pasteurised liquid eggs). Market consensus’ core net profit for FY19-20 stood at RM47.9m and RM59.4m, respectively.

Synergistic JV between Lay Hong-NH Foods Ltd. Lay Hong entered into a JV agreement with NH Foods Ltd (the largest food producer in Japan and one of the top five food processing companies globally) to form NHF Manufacturing (Malaysia) Sdn Bhd (NHFM, which Lay Hong owns a 49% stake while NH Foods owns the remaining 51% stake) in Mar 2016. We believe the JV will benefit Lay Hong into expanding its presence in the frozen processed food product segment (in both local and overseas markets).

New products to be rolled out. Meanwhile, with the Pulau Indah JV (49:51) plant ready by Sep 18, prospects look even brighter as many other products (under five new broad categories such as Hamburg, Meat Ball, Fuwatama Omelet, Add One Veggie and Dim Sum) can be rolled out to the market.

HLIB institutional research has a BUY rating with SOP TP of RM1.24, or 60% upside. We expect Lay Hong to record a robust earnings CAGR of 37.6% from FY17- 20E, underpinned by capacity expansion for the upstream segment (i.e. layer and broiler segment), which will in turn be catered for the growing demand for downstream food products (i.e. pasteurized liquid egg, functional eggs, processed chicken products etc). The vital tie-up with NH Foods will fasten penetration into the growing Halal food demand in Middle East region, Indonesia, Singapore, as well as catering for Olympics 2020 in Tokyo, Japan, by leveraging on its extensive R&D and marketing expertise in the regional markets.

Climactic volumes with bullish Harami candle. Lay Hong has been trending lower, violating few support levels (RM0.905, RM0.87, RM0.81) over the past few weeks and we have noticed huge volumes traded between the RM0.71-0.80 levels, forming a bullish Harami candle yesterday. As most of the momentum oscillators are oversold, we think the downside risk may be limited and could be due for a technical rebound. Next target will be at RM0.81-0.87, followed by RM0.905. Support will be located around RM0.745-0.73, while cut loss will be pegged around RM0.71.

Source: Hong Leong Investment Bank Research - 27 July 2018