INVESTMENT HIGHLIGHTS

• 2QFY19 earnings dropped by -75.5%yoy to RM16.1m in view of significant reduction in ASP

• Nonetheless, the feedmill operation registered an encouraging earnings growth

• Recovery seen in ASP from June 2019 onwards, indicating revival in profitability in the subsequent quarters

• An interim dividend declared of 1.6sen per share

• Upgrade to BUY with an unchanged target price of RM0.88

Significant drop in earnings. Leong Hup International Berhad (LHI)’s 2QFY19 earnings dropped by -75.5%yoy to RM16.1m. This brings its cumulative 1HFY19 earnings to RM76.7m, which is in line with our but lagged consensus expectation, accounting for 40.0% and 36.0% of our full year FY19 forecast respectively. The poor 2QFY19 earnings was driven by the subdued performance of livestock and poultry related segment. During the quarter, there was a significant reduction in average selling price (ASP) of the products sold by the group, particularly in Malaysia. Nonetheless, we expect better earnings going forward due to the recent price recovery.

Livestock and poultry related products. The livestock and poultry related products’ 2QFY19 revenue and EBITDA declined by -11.8%yoy and -64.7%yoy respectively. The poor performance was primarily due to the: (i) reduction in selling price of broiler’s day-old-chicks (DOC) in Malaysia to RM1.21 per DOC (-38.6%yoy) and broiler chicken to RM3.99 per kg (-14.7%yoy); (ii) depressed broiler price in Indonesia and Vietnam and; (iii) absence of revenue from a subsidiary in Singapore, Jordon International Food Processing Pte. Ltd. following the disposal of this subsidiary on 30 June 2018. However, these were partially mitigated by the higher sales volume of DOC and broiler in Indonesia and Vietnam respectively. Consequently, the group’s sales volume of broiler’s DOC and chicken rose by +8.1%yoy and +10.7%yoy respectively.

Feedmill operation. Meanwhile, Feedmill operation’s 2QFY19 revenue and EBITDA rose by +32.6%yoy and +81.4%yoy respectively. These were attributable to the increase in sales volume and average selling price of livestock feed in Indonesia and Vietnam. Note that the new feedmill plant in Dong Nai, Vietnam has begun operation since January 2019. In view of this, sales of livestock feed grew by +13.9%yoy to 583,664 metric tonnes during the quarter.

Source: MIDF Research - 30 Aug 2019