Lay Hong reported a core net loss of RM8.8m in 1HFY19 (vs. core net profit of RM16.6m in 1HFY18). The results disappointed, as we were projecting a core net profit of RM33.2m for FY19. Key culprits to the weaker-than-expected set of results include (i) surprise RM7m impairment at livestock segment, (ii) weaker than-expected processed chicken product sales volume, and (iii) return of deteriorated processed chicken products sold in previous quarter. We cut our FY19-21 core net profit forecasts by 53.8%, 10.2% and 9.4% respectively, largely to account for RM7m impairment incurred in 2QFY19, lower processed chicken product sales volume and higher feed cost assumptions. Maintain HOLD rating with a lower SOP-derived TP of RM0.49 (from RM0.55 previously), as we lower our core net profit forecasts and roll forward our valuation base year to average FY19-20 core net profit.

Another bad quarter. 2QFY19 core net loss of RM10.9m took 1HFY19 total core net loss to RM8.8m (vs. a core net profit of RM16.6m last year). The results disappointed, as we were projecting a core net profit of RM33.2m for FY19. Key culprits to the weaker-than-expected set of results include (i) surprise RM7m impairment at livestock segment (arising from bird flu in Sabah, which affected Lay Hong’s farming operations there, as Lay Hong’s layer and broiler farms are located within the quarantine zone), (ii) weaker-than-expected processed chicken product sales volume, and (iii) return of deteriorated processed chicken products sold in previous quarter.

QoQ & YoY. 2QFY19 performance turned into a core net loss of RM10.9m (from core net profits of RM2.4m in previous quarter and RM12.2m in 2QFY18) mainly due to higher feed costs, lower sales volume for processed chicken products, lower further processed chicken product selling prices, return of deteriorated processed chicken products sold in previous quarter, and impairment on broiler (arising from the bird flu virus detected by the Veterinary department of Sabah in the surrounding area of one of Lay Hong’s layer and broiler farms in Sabah).

YTD. 1HFY19 performance turned into a core net loss of RM8.8m (from a core net profit of RM16.6m in 1HFY18) mainly on lower egg prices and the other same factors mentioned above.

Forecast. We cut our FY19-21 core net profit forecasts by 53.8%, 10.2% and 9.4% respectively, largely to account for RM7m impairment incurred in 2QFY19, lower processed chicken product sales volume and higher feed cost assumptions.

Maintain HOLD, TP: RM0.49. We cut our SOP-derived TP on Lay Hong by 11% to RM0.49 as we lower our core net profit forecasts and roll forward our valuation base year to average FY19-20 core net profit.

While we expect subsequent quarters to come in stronger (relative to 1HFY19) and its on-going expansion plans (for its broiler, pasteurised eggs, and processed frozen product capacities) to translate to better performance from FY20 onwards, we believe it would take a while before earnings recover to previous level, (given the high feed costs). Maintain our HOLD rating on Lay Hong.

Source: Hong Leong Investment Bank Research - 27 Nov 2018