LHI has entered into three related party transactions with its major shareholders to acquire 100% stake in TBC Group (which is engaged in the business of manufacturing, trading and distribution of food products) and The Baker’s Cottage brand bakery business (consisting 9 retail outlets across Selangor, Negeri Sembilan, Melaka and Johor) for a total consideration of RM20.3m. Immaterial impact to earnings for now, as we believe earnings enhancement arising from the abovementioned acquisitions will likely be insignificant given LHI’s existing large earnings base. Nevertheless, the acquisitions allow LHI to own the Baker’s Cottage brand and capture the incremental value add from its poultry related product sales. Maintain core net profit forecasts, TP of RM0.56 (based on 15x FY20 core EPS of 3.7 sen) and HOLD rating.

NEWSBREAK

LHI has entered into three related party transactions with its major shareholders for a total consideration of RM20.3m. These include: (i) share acquisition agreement with Emerging Glory Sdn Bhd for the acquisition of 100% stake in TBC Group (which is engaged in the business of manufacturing, trading and distribution of food products) for RM17.9m; (ii) Business acquisition agreement with Astaka for the acquisition of The Baker’s Cottage brand bakery business (which has 6 retail outlets in Melaka, Negeri Sembilan and Johor) for RM1.5m; and (iii) Business acquisition agreement with Poly Yarn Industries Sdn Bhd for the acquisition of The Baker’s Cottage brand bakery business (which has 3 retail outlets in Selangor) for RM0.9m. In the announcement, TBC Group registered revenue and net profit of RM41.6m and RM0.6m in 2019, but no mention on the profitability of the bakery business. The acquisitions are expected to be completed by 3Q20.

HLIB’s VIEW

Financial impact. Immaterial impact to earnings for now, as we believe earnings enhancement arising from the abovementioned acquisitions will likely be insignificant given LHI’s existing large earnings base. Nevertheless, the acquisitions allow LHI to own the Baker’s Cottage brand and capture the incremental value add from its poultry related product sales (via vertical integration).

Forecast. Maintain for now, pending completion of the acquisition.

Maintain HOLD, with unchanged TP of RM0.56. We maintain our HOLD rating with an unchanged TP of RM0.56 (based on 15x FY20 core EPS of 3.7 sen). At current level, LHI is trading at FY20-21 P/E of 18.3x and 14.1x, respectively. 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 - 8 Jun 2020