LHI is one of the largest fully integrated producers of poultry, eggs and livestock feeds in Southeast Asia (SEA) region. Having reflected the weak livestock prices in 2Q19, we project core net profit to decline by 11.6% to RM194.2m in FY19. We forecast FY20-21 core net profit to increase by 15.1- 15.2% to RM233.5m and RM257.5m, underpinned by higher livestock and feedmill sales volume (arising from capacity expansion). We initiate coverage on LHI with a BUY rating and TP of RM1.10 based on 18x FY20 EPS of 6.1 sen.

Background. LHI is one of the largest fully integrated producers of poultry, eggs and livestock feeds in SEA region, with operations in Malaysia, Singapore, Indonesia, Vietnam and the Philippines. LHI’s operations can be classified into 2 major segments, namely feedmill and livestock segments.

Operating in fast-growing ASEAN consumer markets with rising poultry consumption. LHI operates in SEA with significant growth potential, underpinned by (i) favourable age demographic and growing population, (ii) increasing affluence and disposable income, and (iii) significant growth potential in the consumption of proteins, in particular, poultry meat.

Ongoing expansion plans to further strengthen LHI’s foothold in SEA region. LHI is still in expansion mode in the near future (of which it has planned capex of RM437m in FY19) in order to strengthen its presence in the SEA region (in particular, the 5 markets it operates in). Besides, we note that LHI is exploring Cambodian market through livestock imports, and may enter production there in the future when it sees sufficient demand from local customers.

Lower feed prices – a boon to livestock production cost. The primary raw materials for LHI’s feedmill business are corn and soybean meal. We note that prices of both corn and soybean meal have eased since Jul-19. Lower feed prices augur well for livestock production cost, as feed is the main cost component in producing livestock.

Strong economies of scale. LHI is the largest integrated poultry producer in Malaysia and among the top 3 integrated producers in Indonesia and Vietnam. The sheer production size gives LHI an advantage over smaller competitors in the sourcing of raw materials, production and distribution of poultry and livestock feeds.

Fully-integrated business model. The integrated business model provides LHI with significant competitive advantage over other non-integrated players in terms of operating flexibility and resilience.

Forecast. We project a core net profit of RM194.2m in FY19 (-11.6% YoY), as we expect LHI’s performance to recover in 2H19 (1H19: -35.6%), underpinned by a recovery in livestock prices in Malaysia and Indonesia, and higher livestock and feedmill sales volume. We project FY20-21 core net profit to increase by 15.1-15.2% to RM233.5m and RM257.5m, underpinned by higher livestock and feedmill sales volume (arising from capacity expansion).

Initiate with BUY; TP of RM1.10. We initiate coverage on LHI with a BUY rating and TP of RM1.10 based on 18x FY20 EPS of 6.1 sen. At current share price of RM0.805, we believe the weak 2Q19 performance has already been more than reflected in recent share price performance (which has plunged 26% since IPO listing), and we expect LHI’s performance to recover considerably in 2H19, underpinned by (i) a strong recovery in broiler and DOC prices in Malaysia and Indonesia; and (ii) higher capacity at both feedmill and livestock segments.

Source: Hong Leong Investment Bank Research - 20 Sept 2019