We are turning more positive on LHI’s near term earnings prospects, on the back of the recent improvement in livestock prices in Malaysia and Indonesia (which will more than mitigate higher feed costs) and encouraging performance improvement at its downstream segment. We maintain our FY20-22 core earnings forecasts and TP of RM0.76 (based on 18x FY21 EPS of 4.2 sen), but upgrade our rating to BUY (from Hold earlier), given the improving near-term earnings prospects and more palatable valuation following recent share price retracement.

We are turning more positive on LHI’s near term earnings prospects, on the back of the recent improvement in livestock prices in Malaysia and Indonesia (which will more than mitigate higher feed costs) and encouraging performance improvement at its downstream segment (i.e. The Baker’s Cottage, TBC).

Improvement in livestock product prices since end-2020. We understand that livestock prices in Malaysia and Indonesia (the key markets for LHI’s livestock segment, particularly, day-old-chick and broiler) have been improving since Dec-2020 (which will more than mitigate higher feed costs), due mainly to (i) Indonesian government’s ongoing efforts to control day-old-chick supply (by limiting egg hatching and bringing in early culling of parent stocks), (ii) supply chain adjustment among contract farmers (as a result of rising feed costs and depressed poultry product prices in 2020) and (iii) seasonality, as livestock prices are typically stronger in 1Q due to festive season. While it remains to be seen if recent recovery in livestock prices could sustain over the longer term, we believe it is unlikely for poultry product prices to revisit their previous lows (i.e. 2Q20), as (i) economic activities have resumed gradually since then and (ii) high feed cost (mainly corn and soybean meal, which prices have risen considerably since 3Q20) will likely deter smaller scale farmers from expanding capacity.

On track to achieve 150 TBC outlets by end-2021. Having surpassed its target of 80 TBC outlets by end-2020, we understand that LHI has achieved 105 TBC outlets thus far and is on track to achieve 150 outlets by end-2021. Apart from allowing LHI to partly mitigate the volatile poultry product prices (by shifting a portion of its broiler supply from conventional wholesale market into ready-to-eat poultry products, i.e. roasted chicken directly to end consumers via TBC outlets), we understand that this marketing strategy has also boosted sales of its bakery products, which carry more superior margins relative to its ready-to-eat poultry products, which in turn helps stabilising earnings at Malaysian operations over the longer term.

Feedmill segment - will remain as a stable business. Despite having anticipated margin normalisation at feedmill segment to continue in the near term (due to feedmill capacity expansion in Vietnam), we believe bottomline contribution from the segment will remain stable going forward, as lower margin will likely be mitigated by higher sales volume in Vietnam (arising from the ongoing feedmill capacity expansion in Vietnam and Philippines).

Forecast. Maintain, pending results announcement on 23 Feb 2021.

Upgrade to BUY, with unchanged TP of RM0.76. Maintain TP of RM0.76 based on unchanged 18x FY21 EPS of 4.2 sen. We upgrade our rating on LHI to BUY (from Hold earlier), given the improving near-term earnings prospects and more palatable valuation following recent share price retracement (which has declined by >20% since 6 months ago). At RM0.685, LHI is trading at FY20-21 P/E of 25.6x and 16.1x, respectively.

Source: Hong Leong Investment Bank Research - 15 Feb 2021