We consider 1H22 core net profit of RM60.9m (-41.2% YoY, accounting for 52.5- 56.3% of consensus and our full-year estimates) within our expectation, as bulk the improvement in 2Q22 performance was driven by the lumpy subsidy payment. Maintain earnings forecasts, TP of RM0.56 (based on unchanged 18x FY23 core EPS of 3.1sen) and HOLD rating, pending more details from analyst briefing.

Inline. 2Q22 core net profit of RM37.4m (+58.9% QoQ; +18.2% YoY) took 1H22 total sum to RM60.9m (-41.2% YoY), accounting for 52.5-56.3% of consensus and our full year estimates. We consider the results within our expectation, as bulk the improvement in 2Q22 performance was driven by the lumpy subsidy payment (RM15.3m vs. RM1.3m a year ago). Core net profit of RM60.9m in 1H22 was arrived after adjusting for (i) RM1.5m impairment losses and write-offs, (ii) RM0.4m share option expense, and (iii) RM0.6m gain on disposal.

QoQ. Core net profit surged by 58.9% to RM37.4m in 2Q22, boosted mainly by higher ASP and sales volume of broiler chickens in Vietnam and higher subsidy payment, which altogether more than mitigated lower earnings contribution from feedmill segment and a sharp reduction in earnings contribution from Indonesia operations.

YoY. Core net profit increased by 18.2% to RM37.4m in 2Q22, helped by (i) higher ASPs and sales volume at livestock product segment, (ii) improved contribution from feedmill segment (arising from higher selling price and sales volume in Indonesia, higher selling price in Vietnam, and higher sales volume in Philippines), and (iii) higher subsidy payment.

YTD. 1H22 core net profit declined by 41.2% to RM60.9m, dragged by (i) escalated feed cost, which more than offset higher ASPs and sales volume of broiler chickens and eggs in Vietnam and higher revenue contribution from Malaysia (from higher eggs prices and revenue contribution from its downstream business-to-consumer channel) at livestock product segment, and (ii) margin compression at feedmill segment (particularly, during 1Q22).

Outlook: Escalated raw material costs remains the key challenge. While economic reopening have resulted in improvements in demand, earnings visibility remains highly uncertain on the back of high cost of raw materials and attempts by government to control food inflation.

Forecast. Maintain for now, pending more details from analyst briefing.

Maintain HOLD with unchanged TP of RM0.56. We maintain our HOLD rating on LHI, with an unchanged TP of RM0.56 based on unchanged 18x FY23 core EPS of 3.1sen.

Source: Hong Leong Investment Bank Research - 1 Sept 2022