We downgrade our rating on LHI to HOLD with a lower TP of RM0.56 (from RM0.92 earlier), based on revised 15x FY20 EPS of 3.7 sen, as the imposition of lockdowns in Southeast Asia region (where LHI operates in) arising from Covid-19 pandemic have resulted in weaker demand and prices for poultry products (in particularly, DOC and broiler). It is unlikely for demand and ASPs to recover swiftly to pre-lockdown level (even if lockdowns are to be lifted soon), as we believe social distancing practices will likely remain for a while, resulting in persistent weak demand from institutional customers.

Key Highlights From Our Recent Conversion With LHI’s Management Include:

Impact from Covid-19 pandemic. The imposition of lockdowns in Southeast Asia region (where LHI operates in) arising from Covid-19 pandemic has resulted in weaker demand and prices for poultry products (in particular, DOC and broiler), as stronger poultry demand from retail market (for fresh chickens and further processed products) is more than offset by weaker demand from institutional customers (such as full-service restaurants, hotels, and F&B outlets). While demand for livestock feed, eggs and further processed products remains resilient so far, we note that these are insufficient to mitigate weaker demand and prices for DOC and broiler.

Demand and ASP recovery unlikely be soon and swift. It is unlikely for demand and ASPs to recover swiftly to pre-lockdown levels (even if lockdowns are to be lifted soon), as we believe social distancing practices will likely remain for a while, resulting in persistent weak demand from institutional customers. Indonesian government had historically instructed poultry players to cull hatching eggs, in a move to support poultry prices. However, such move is unlikely to happen in the near term in our view), in order to ensure ample food supplies.

Forward purchase policy remains intact. Although corn prices (the key feed materials) have declined by more than 15% since Oct-19, management is maintaining its feed inventory of 3 months, and will not engage in more aggressive inventory replenishing activities.

Potential delays to current expansion plan. While expansion plans remain intact for now, management shared that completion dates of the current expansion projects will likely be delayed, as the lockdown has resulted construction activities being suspended. Besides, we do not discount the possibility of LHI scaling back some of its regional expansion plans (which have yet to be embarked on), in an attempt to conserve cash flow amidst challenging operating environment.

Forecast. Given the weak demand and prices (which will likely persist until beyond 1H20, depending on how soon Covid-19 cases will subside), we slash our FY20-21 core net profit forecasts by 27.6% and 22.8% to RM135.5-175.9m, largely to account for lower ASP and sales volume assumptions for DOC and broiler.

Downgrade to HOLD, with lower TP of RM0.56. Lower profit forecasts aside, we also lower our target P/E on LHI to 15x (from 18x previously), as we believe it would take a while for earnings recovery to happen. Our new TP of RM0.56 (vs RM0.92 earlier) is based on revised 15x FY20 EPS of 4.8 sen. We downgrade our rating on LHI to HOLD (from Buy earlier) in anticipation of weak near-to-medium term earnings prospects.

Source: Hong Leong Investment Bank Research - 15 Apr 2020