• Recently, we conducted a site visit to Yenher Holdings Berhad in Penang. The objective of this visit was to gain deeper insights into the company's operational procedures, management strategies, overall business climate, and financial performance. We initiated coverage for this company in June 2023, setting a target price of RM1.13.

New production plant

• In relation to its new plants, the current status of construction stands at 20% completion. Upon the completion of the new plant, the annual capacity is projected to increase by a significant 377% compared to the previous capacity. The project's full completion is expected by the latter half of CY2025, aligning with the information presented in the earlier report.

• The revised estimated cost for the project, excluding the land expenses, is approximately RM65.0 million. This represents an increase of about RM20.0 million from the previous estimate. These additional funds will be sourced from internal resources and a portion of the IPO proceeds, which have been allocated for the working capital purpose. It's important to note that the management currently has no intentions of utilizing any form of bank borrowings for this purpose.

• It is worth mentioning that the new facility has been designed with the welfare of the workers in mind. Its proximity to the hostel ensures added convenience for the workforce. Additionally, the integration of modern equipment and advanced manufacturing production lines in the new plant serves to significantly enhance the operational efficiency of the Group. This heightened efficiency allows for the redistribution of a significant portion of the workforce, resulting in an almost 50% reduction in required manpower.

Mulling distribution of African Swine Fever vaccine

• The future trajectory for Yenher is poised to be shaped by the potential sales of swine vaccines intended to counter African Swine Fever (ASF). Currently, negotiations are underway with the government for the registration and utilization of these vaccines within Malaysia. Presently, the government's primary approach to dealing with ASF involves culling, a costly and labour intensive measure to prevent the disease's spread. However, we believe this approach may only yield short-term containment, as the intricacies of the issue extend beyond immediate solutions. This could consequently impact food security in Malaysia, leading not only to a scarcity of pigs and pork products but also triggering a ripple effect causing consumers to shift towards other protein sources due to the high cost associated with pork.

• Prior to the ASF outbreak, Malaysia had sufficient domestic supply. However, the outbreak led the government to advocate importing pigs and pork products from Europe to counter the supply deficit, driven by the reduction in the domestic pig population. In the long term, continuous importation could lead to forex losses for Malaysia. Yenher's management notes that Malaysia’s annual pork consumption per capita stands at 25 kg.

• In terms of prospects, Yenher's business segments complement each other. If the government permits Yenher to distribute the ASF vaccine, pig farmers' confidence is expected to rise, potentially leading to pig repopulation over a span of six months for a complete cycle. This would consequently bolster sales across all segments – both manufacturing and distribution. Notably, the management could be the first company to distribute the ASF vaccine once it receives official approval and registration. Presently, some of Yenher's customers are contemplating pig repopulation, albeit on a smaller scale compared to pre-outbreak numbers.

• In summary, the ASF outbreak remains the most significant threat to Malaysia's pig farming sector. We envision that the manufacturing segments will continue to be the primary revenue contributor in the long run for the Group, making the sales of ASF vaccines a one-time catalyst for Yenher Holdings Berhad. This rationale supports our sales and earnings forecasts for FY2023F and FY2024.

Earnings Outlook

• Moving into the future, there are projections indicating a strong revenue trend. Our estimates stand at RM386.5 million (+9% yoy), RM388.9 million (+1% yoy), and RM630.8 million (+62% yoy) for FY2023F, FY2024F, and FY2025F, respectively after including expected contributions from the ASF vaccine and new production plant. This marks a noteworthy CAGR of 39% in revenue from FY2020 to FY2025F. A significant point of interest revolves around FY2025F, where a substantial upswing in the Group's financial performance is on the horizon. This notable shift can be largely attributed to the anticipated completion and activation of operations at a new plant in the later part of FY2025F, expected to triple the annual production capacity. Furthermore, expected increased sales of swine vaccines designed to combat the highly fatal ASF, boasting a mortality rate of up to 100%, are poised to play a pivotal role in driving this growth. The evident demand for the swine vaccine is projected to be a prime catalyst behind the expansion of revenue.

• Anticipated net earnings stand at RM28.8 million (+33% yoy), RM27.9 million (-3% yoy), and RM54.4 million (+95% yoy) for FY2023F, FY2024F, and FY2025F, correspondingly, with corresponding net margins of 7%, 7%, and 9%. The marginal increase in margins in FY2025F can be attributed to consistent revenue contributions from both the manufacturing and distribution sectors.

Valuation and Recommendation

• Currently, Yenher Holdings Berhad is being traded at a PE multiple of 12.7x based on current EPS of 7 sen, considering the current price.

• In terms of valuation, the stock's PE multiple is at 38.6% discount when compared to the PE multiple of the Bursa Malaysia Consumer Index. This discount aligns closely with the average PE multiple of Yenher's comparable companies.

• However, it is worth noting that the present PE multiple is marginally higher in comparison to its historical 1-year average PE multiple of 12.2x.

• We believe the stock is considered to be undervalued at this juncture. We reiterate our Buy call with a target price of RM1.13 based on DCF with 5% WACC and 2.5% terminal growth.

Risks

• Possibility that the ASF vaccine might not receive approval from the authorities.

• The new plant's schedule being postponed.

• Dependent on the livestock industry population.

• Outbreak of animal diseases.

• Market’s competitive landscape.

• Exposed to political, economic and regulatory risks.

• Price volatility and supply of raw materials interruption.

• Dependency and the business relationship with suppliers.

• Exposed to shipping disruption and fluctuation in shipping & freight rates.

Source: JF Apex Securities Research - 18 Aug 2023