While 1Q was historically a good quarter (due to higher broiler chicken prices ahead of festive season), we believe this will unlikely be the case for LHI’s upcoming 1Q20 performance (due out in May-20), due to Covid-19 outbreak and weak consumer sentiment. We trimmed our FY20-21 core net profit forecasts by 8.1% and 6.8%, mainly to account for lower sales volume and ASP assumptions on broiler chickens and DOC in Malaysia. Correspondingly, we lower our TP on LHI by 8% to RM0.92 based on 18x revised FY20 EPS of 5.1 sen. Maintain BUY rating.

Key Highlights From Yesterday’s Conference Call With LHI’s Management Include:

Recap on 4Q19 results. LHI’s 4Q19 core net profit fell 14.9% QoQ to RM42.1m (from RM49.4m in 3Q19) as higher ASPs of broiler chickens and DOC in Indonesia and broiler chickens in Vietnam were more than negated by lower ASPs of broiler chickens and DOC in Malaysia, and weaker performance in Singapore.

Moving to 1Q20… While 1Q was historically a good quarter (due to higher broiler chicken prices ahead of festive season), we believe this will unlikely be the case for LHI’s upcoming 1Q20 performance (due out in May-20), due to Covid-19 outbreak and weak consumer sentiment.

Malaysia – near-term outlook impaired by Covid-19 outbreak. Management shared that it has already felt the impact of Covid-19 outbreak on its DOC sales volume since late-Jan, and it may drag LHI’s DOC sales volume by 10-15%, should the outbreak persist.

Singapore – gradually diversifying into RTE segment. We understand that near term earnings outlook in Singapore will likely remain dimmed, due to weak consumer sentiment, Covid-19 outbreak, and competitive pricing environment. To address the weak near-term outlook, management shared that it is gradually diversifying its product range to the ready-to-eat (RTE) segment (by offering more processed meat products to more customers), in an attempt to broaden its revenue base in a gradual manner.

Indonesia – prices remain stable since 4Q19. Prices of DOC and broiler chickens have remained stable since 4Q19, due to hatching egg culling since 2Q19. However, it remains to be seen if the price stability will sustain over the longer term, as the recent production culling was just a small fraction of the total production volume.

Vietnam. Management remains optimistic on Vietnam, thanks to (i) robust demand for chicken meat, which has in turn resulted in higher ASP and sales volumes of broiler chickens, and (ii) strong demand potential for animal feed, which in turn augurs well for its feedmill segment there. Besides, management highlighted that it is unaffected by H5N6 bird flu in Vietnam, and it shared that only backyard farmers are affected so far.

Forecast. We trim our FY20-21 core net profit forecasts by 8.1% and 6.8%, mainly to account for lower sales volume and ASP assumptions on broiler chickens and DOC in Malaysia.

Maintain BUY with lower TP of RM0.92. Post earnings adjustment, we maintain our BUY rating on LHI, with a lower TP of RM0.92 (vs. RM1.00 earlier) based on 18x revised FY20 core EPS of 5.1 sen. We believe re-rating catalyst would re-emerge when ASP for broiler products recovers, which hinges on Covid-19 outbreak subsiding and potentially more stimulus packages being announced.

Source: Hong Leong Investment Bank Research - 20 Feb 2020