INVESTMENT HIGHLIGHTS

• 1QFY19 earnings rose by +14.9%yoy to RM60.5m, well within our expectation

• The strong performance of livestock and poultry segment was attributed to the increase in sales volume and average selling price

• Feedmill operation’s earnings was boosted by the commencement of new feedmill plant in Vietnam

• Maintain BUY with a target price of RM1.34

1QFY19 earnings rose by +14.9%yoy to RM60.5m. Leong Hup International Berhad (LHI)’s 1QFY19 earnings came in at RM60.5m. This is in line with our expectation, accounting for 31.2% of our full year FY19 as we believe this is seasonally a stronger quarter. Note that historically poultry consumption is the lowest during the third quarter subsequent to the month of Ramadan and Hari Raya. Compared to the corresponding quarter last year, revenue and earnings rose by +11.9%yoy and +14.9%yoy respectively. The commendable 1QFY19 earnings were attributed to the encouraging performance of LHI’s main operating segment namely: (i) livestock and poultry related products and; (ii) feedmill operation.

Livestock and poultry related products. The livestock and poultry related products’ contributed about 57.1% of LHI’s 1QFY19 revenue. Operating profit wise, it grew by +25.9%yoy to RM118.9m which was contributed by the: (i) increase in sales volume and average selling price of eggs in Malaysia and; (ii) increase in average selling price of Broiler DOCs in Indonesia. These were mitigated by the loss of revenue from a subsidiary, Jordon International Food Processing Pte. Ltd. following the disposal of this subsidiary on 30 June 2018.

Feedmill operation. Feedmill operation’s 1QFY19 operating profit rose by +36.3%yoy to RM85.2m. These were attributed to the: (i) increase in sales volume and average selling price of livestock feed in Indonesia and Vietnam and; (ii) commencement of new feedmill plant in Dong Nai, Vietnam in January 2019. The plant is LHI’s fourth plant and expected to boost LHI’s annual feedmill production to about 1.35m tonnes in 2019.

Impact to earnings. We maintain our earnings forecast as it still within our expectation.

Target price. We value LHI at RM1.34 per share based on pegging FY20F EPS of 6.0sen to target PER of 24.0x. This is premised on the average historical three-year mean PER of similar companies that engage in poultry operation.

Reiterate BUY. Going forward, we expect that earnings growth will be sustained driven by the LHI’s: (i) economies of scale; (ii) vertically integrated business model and; (iii) geographically diversified operation. In addition, we are also positive on the group’s future plan to consolidate its leading position in Malaysia and Singapore as well as to grow its integrated business model in newer markets especially the Philippines. With these expansion plans in the pipeline, we believe that LHI will be able to achieve a positive result for FY19.

Source: MIDF Research - 14 May 2019