INVESTMENT MERIT

We are calling a “Trading Buy” on LAYHONG with a fair value of RM1.20. Turnaround in egg prices and investment to improve capacity are positives for the medium term. Furthermore, the completion of a new processing plant would boost earnings of the joint-venture with NH Foods Ltd. We believe this would translate to FY18E/FY19E core earnings growth of 85%/34%.

Normalising egg market could result in a more stable outlook. Egg prices in 2016 were depressed due to an oversupply in the market. However, industry-wide production cuts arising from a potential avian influenza outbreak during 1HCY17 allowed prices to recover to higher levels. Grade ‘A’ egg prices are estimated to be priced at RM0.38/each on average for Feb 2018 against RM0.35/each in Jun 2017 (Source: fama.gov). Barring sudden shifts in consumption habits, we believe the normalised demand and supply would benefit sales in this segment from an organic demand growth coinciding with national population growth. Going forward, an estimated CAPEX of c.RM40.0m would be invested to expand production of egg products and broiler capacity.

Partnership with NH Foods to pay off. In Mar 2016, the group entered into a joint-venture with NH Foods Ltd. NH Foods Ltd. specialises in processed Japanese foods and aims to penetrate into the Halal export markets and capitalise on the 2020 Tokyo Olympics. Under this agreement, the group provides the necessary Halal production capabilities via the construction of a new food processing plant. The plant will double the group’s processing capacity and is expected to roll out by 2H19. Processed foods are the largest contributor to group integrated livestock farming (“ILF”) sales at c.55% in FY17.

Uninspiring retail segment. The group’s retail segment, under the G*Mart chain in East Malaysia, is facing challenges from high operating costs, due mainly to higher minimum wages. Coupled with soft consumer spending, the segment operates with unstable low profit margins. Despite a recent increase in outlet base by three outlets to 15 outlets in FY18, the negative same-store-sales growth suggests further weakness in potential contributions. FY17 retail sales accounted for c.18% of total group revenue but saw operating losses of RM1.4m. In May 2017, the Group sold a 30% stake in G*Mart to PanPages Bhd in collaboration for an online marketplace.

In FY18E/FY19E, we anticipate sales growth of c.21%/c.18% driven predominantly by better egg contributions and processed food demand. The new processing plant should also play well (with both LAYHONG brands and NH Foods associate’s contributions). Hence, we anticipate operating margins expansion to 6.5%/6.9% for FY18E/FY19E (from 4.4% in FY17) arising from better efficiency gains and scale from the above. This would buoy the flattish retail segment performance. Our FY18E/FY19E PATAMI estimates stand at RM33.9m/RM45.3m (+85%/+34%). Assuming FY17 dividend payout ratio of c.20%, FY18E/FY19E will see 1.0 sen/1.5 sen dividend payouts or yields of 1.1%/1.6%.

“Trading Buy” with a fair value of RM1.20, ascribing a 17.0x PER on FY19E EPS of 7.2 sen. The valuation is closely in-line with the stock’s 12-month average trading Fwd. PER and a 15% discount against selected ILF and food manufacturer peers’ 1-year Fwd. average. We believe this valuation is fair given the stock has been consistently trading at this level. The lower dividend yield expectation of 1.6% against the peers’ average of 2.2% also justifies the discount from ascribing matching valuations.

Source: Kenanga Research - 20 Mar 2018