KEY INVESTMENT HIGHLIGHTS

• 3QFY19 earnings came in at RM44.4m (+26.1%yoy) which lagged our and consensus’ expectation

• Earnings was lifted by the recovery in average selling price of products sold in Malaysia

• However, this was mitigated by the subdued performance of livestock and poultry related segment in other countries

• Growing feedmill operation to support 4QFY19 earnings growth

• Downgrade to NEUTRAL with a revised TP of RM0.85

Earnings lagged expectations. Leong Hup International Berhad (LHI)’s 3QFY19 earnings improved by +26.1%yoy to RM44.4m. Nevertheless, its cumulative 9MFY19 earnings of RM121.1m still lagged our and consensus expectation, accounting for 62.4% and 60.6% of full year FY19 forecast respectively. The 3QFY19 earnings was lifted by the recovery in average selling price (ASP) of products sold in Malaysia. Nonetheless, this was partially mitigated by the subdued performance of livestock and poultry related segment in other countries. During the quarter, there was a significant reduction in average selling price (ASP) of the livestock products sold by the group, particularly in Indonesia and Vietnam.

Livestock and poultry related products. The livestock and poultry related products’ 3QFY19 revenue rose by +5.3%yoy. However, the segment’s EBITDA suffered significant decline of -60.5%yoy. The poor performance was primarily due to the: (i) lower EBITDA margin arising from subdued prices of day-old-chicks (DOC) in Indonesia and; (ii) depressed broiler chicken prices in both Indonesia and Vietnam. However, these were partially mitigated by the increase in ASP of broiler chickens and eggs in Malaysia. The ASP of local live broiler chicken rose to RM5.20 per kg (+12.5%yoy) while ASP of eggs was up +4.6%yoy to 35.0sen per egg.

Feedmill operation. Meanwhile, the feedmill operation’s 3QFY19 revenue rose by +10.0%yoy while EBITDA had doubled in comparison to the last corresponding quarter. These were attributable to the increase in sales volume and ASP of livestock feed in Indonesia and Vietnam. Note that the new feedmill plant in Dong Nai, Vietnam has begun operation since January 2019. Consequently, 3QFY19 EBITDA margin for the segment expanded +9.0ppts to 20.0%. While livestock and poultry related products remain the main revenue driver, the feedmill segment’s EBITDA contribution has significantly surpassed that of the former with 77.0% contribution.

Impact to earnings. We are revising our FY19F and FY20 earnings forecasts downward by -12.0% and -4.8% to take into account the depressed ASP of livestock products in Indonesia and Vietnam.

Source: MIDF Research - 27 Nov 2019