9M21 core net profit of RM53.5m (-20.3%) came in below expectations, accounting for only 27.7-42.4% of consensus and our full-year estimates, due to higher-than-expected feed prices at livestock segment. We cut our FY21-23 core net profit forecasts by 19.4%, 11.5%, and 9.5%, respectively, mainly to account for higher feed cost assumptions. Following the downward adjustment in our core net profit forecasts, we lower our TP on LHI by 14.1% to RM0.67 based on 18x revised mid FY21-22 core EPS of 3.7 sen. Maintain our BUY rating on LHI, as we view LHI a 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.

Below expectations. 3Q21 core net loss of -RM53.4m (vs. core net profits of RM30.5m in 2Q21 and Rm25.8m in 3Q20) took 9M21 sum to RM53.5m (-20.3% YoY). Despite having expected 3Q to be weaker (on the back of weak demand for livestock products as a result of lockdowns in most operating countries and surging feed prices), the results turned out to be much weaker than we earlier anticipated (accounting for only 42.4% of our full-year estimate), due to higher-than-expected feed prices at livestock segment. Against consensus, the results missed by an even bigger margin (accounting for only 27.7% of estimate).

Exceptional items (EIs) in 9M21. Core net profit of RM53.5m in 9M21 was arrived after adjusting for (i) RM7.1m impairment loss, (ii) RM2.3m gain on disposal of PPE, and (iii) RM1.2m share option expense.

QoQ. 3Q21 performance reversed to a core net loss of -RM53.4m (from a core net profit of RM30.5m in previous quarter), dragged mainly by (i) lower sales volume of livestock feed and ASP of DOC in Indonesia, and (ii) significantly higher livestock feed costs.

YoY. Despite a 15% increase in topline, 3Q21 performance reversed to a core net loss of -RM53.4m (from a core net profit of RM25.8m SPLY), dragged mainly by weak performance at livestock segment arising from (i) depressed ASP of broiler chickens in Vietnam, (ii) inability to pass on higher feed cost (as Covid-19 pandemic hurt demand for livestock products), and (iii) weaker feedmill segment (as a result of the surge in raw material costs, which outpaced the increase in feed prices).

YTD. Core net profit fell 20.3% to RM53.5m in 9M21, as (i) improved ASP and sales volume of DOC and broiler chickens in Indonesia and higher ASP and sales volume of broiler chickens in Philippines were more than negated by higher D&A charges, (ii) margin erosion at feedmill segment (as ASP lagged raw material price surge).

Forecast. We cut our FY21-23 core net profit forecasts by 19.4%, 11.5%, and 9.5%, respectively, mainly to account for higher feed cost assumptions.

Maintain BUY with lower TP of RM0.67. Following the downward adjustment in our core net profit forecasts, we lower our TP on LHI by 14.1% to RM0.67 based on 18x revised mid FY21-22 core EPS of 3.7 sen. Despite the earnings headwinds, we maintain our BUY rating on LHI, as we view LHI a 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 - 24 Nov 2021