We anticipate LHI’s 3Q21 earnings to come in weaker (both QoQ and YoY) due to (i) lower livestock product prices and sales volume in 3Q21, (ii) significantly higher feed prices, and (iii) margin compression at feedmill segment. However, we expect LHI’s earnings to improve from 4Q21 onwards, as gradual economic reopening across operating countries augurs well for demand for livestock products. We tweak our FY21-22 core net profit forecasts lower by -21.4% and -3.7%, mainly to reflect higher feed cost assumptions. Post earnings revisions, we maintain our BUY rating on LHI with a lower TP of RM0.78 (based on 18x revised mid FY21-22 EPS of 4.4 sen).

Anticipating weak 3Q21. We anticipate LHI’s 3Q21 earnings (due out by end-Nov) to come in weaker (both QoQ and YoY) due to (i) lower livestock product prices and sales volume in 3Q21 (as demand for livestock products was hampered by lockdowns in most operating countries, particularly in Jul-Aug), (ii) significantly higher feed prices (as a result of soaring corn and soybean meal prices), which LHI was unable to pass on to its customers amid weak livestock demand, and (iii) margin compression at feedmill segment (as LHI was only able to pass a fraction of the rising raw material prices to its customers amid weak livestock product demand).

Better fortunes from 4Q21 onwards We expect LHI’s earnings to improve from 4Q21 onwards, as gradual economic reopening across operating countries (in particular, Malaysia and Indonesia, which collectively account for more than 50% of LHI’s revenue) augurs well for demand for livestock products, hence allowing LHI to have better flexibility in passing on higher feed costs to customers (through higher livestock product prices). Besides, we believe improving demand prospects for livestock products will result in better demand and pricing power at feedmill segment, as better livestock product prices encourages supply of livestock products.

Over the longer term… We understand that LHI is on track to achieve 160 TBC outlets by end-FY21 (200-210 outlets by end-FY22, and 280 outlets by end-FY23). The ongoing expansion in LHI’s business-to-consumer (B2C) channel (via the expansion of TBC outlets) will further mitigate the volatile livestock product prices (by channeling a portion of its its broiler supply from conventional wholesale market into ready-to-eat poultry products, i.e. roasted chicken directly to end consumers via TBC outlets) over the longer term. Based on our estimates, TBC will consume at least 30% of LHI’s broiler supply in Malaysian operations by FY24. Besides, such move wiil help boosting 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

Forecast. We tweak our FY21-22 core net profit forecasts lower by -21.4% and -3.7%, mainly to reflect higher feed cost assumptions and lower livestock product prices (for FY21).

Maintain BUY, with lower TP of RM0.78. Post earnings revisions, we maintain our BUY rating on LHI with a lower TP of RM0.78 (based on 18x revised mid FY21-22 EPS of 4.4 sen). At RM0.665, LHI is trading at FY21-22 P/E of 19.3x and 12.7x, which is undemanding in our view, as LHI is a good proxy to economic reopening in the Southeast Asia region (given its exposure in Malaysia, Indonesia, Singapore, Vietnam and Philippines). Over the longer term, we believe further re-rating is warranted, should LHI succeed in replicating its B2C channel beyond Malaysia operations.

Source: Hong Leong Investment Bank Research - 14 Oct 2021