Lay Hong reported a core net loss of RM4.9m in 9MFY19 (vs. core net profit of RM26.7m in 9MFY18). The results disappointed, as we were projecting a core net profit of RM15.3m. Key culprits to the weaker-than-expected set of results include (i) lower-than-expected egg production (2.4m eggs/day vs. 3m eggs/day we projected), and (ii) weaker-than-expected performance at JV entity. We cease coverage on Lay Hong as we believe it would take a while before earnings meaningfully turnaround. As such, our previous core net profit forecasts, HOLD recommendation, and SOP-derived TP of RM0.49 should no longer be used as a reference going forward.

Another bad quarter. 3QFY19 core net profit of RM3.8m took 9MFY19 core net loss to RM4.9m (vs. core net profit of RM26.7m in 9MFY18). The results disappointed, as we were projecting a core net profit of RM15.3m. Key culprits to the weaker-than expected set of results include (i) lower-than-expected egg production (2.4m eggs/day vs. 3m eggs/day we projected), and (ii) weaker-than-expected performance at JV entity.

QoQ. 3QFY19 performance returned to the black, with a core net profit of RM3.8m (vs. a core net loss of RM10.9m in 2QFY19), due to higher prices for table eggs and further processed chicken products, and absence of lumpy impairment (recall, Lay Hong incurred a RM7m impairment at its livestock segment in 2QFY19 arising from bird flu in Sabah, which has affected Lay Hong’s farming operations there, as its layer and broiler farms are located within the quarantine zone)and widened losses at JV entity (start-up losses, we suspect).

YoY. 3QFY19 core net profit declined by 62.9% to RM3.8m mainly on the back of lower eggs output, lower processed chicken product sales volume, higher feed cost, and widened losses at JV entity (possibly due to start-up losses).

YTD. 9MFY19 performance turned into a core net loss of RM5.1m (from a core net profit of RM26.7m a year ago), due mainly to lower eggs output, lower sales volume for processed chicken products, RM7m impairment on broiler sub-segment incurred in 2QFY19, widened JV losses, and higher finance cost.

Cease coverage. We cease coverage on Lay Hong as we believe it would take a while before earnings meaningfully turnaround. As such, our previous core net profit forecasts, HOLD recommendation, and SOP-derived TP of RM0.49 should no longer be used as a reference going forward.

Source: Hong Leong Investment Bank Research - 26 Feb 2019