KEY INVESTMENT HIGHLIGHTS

• 1QFY20 normalised earnings came in below ours and consensus’ expectations at RM21.8m (-64%yoy)

• Lower average selling prices (ASP) of livestock products dented revenue and earnings

• FY20E/FY21F earnings cut by -27.2%/-9.7%

• Maintain NEUTRAL with a revised TP of RM0.60 (previously RM0.82)

1QFY20 normalised earnings came in at RM21.8m (-64%yoy),which were below ours and consensus’ expectations at 10.6% and 13.6% of full year estimates. The lower than expected results can be attributed to lower average selling prices (ASPs) of livestock products.

Lower ASPs of livestock products dented revenue and earnings. Leong Hup International Berhad (LHI)’s 1QFY20 earnings tumbled - 64%yoy to RM21.8m as revenue dipped -4.8%yoy to RM1.43b. The lower on-year performance can be attributed to lower ASPs of day-oldchicks (DOC), broiler chickens and eggs in Malaysia. Similarly, ASP for DOC also declined significantly over the quarter in Indonesia. In Singapore, revenue saw a slight dip of -4.1% due to lower sales volume of fresh chicken and duck. On the flipside, Vietnam and the Philippines saw revenue improved by 21.6% and 74.5% to RM356.5m and RM34.7m respectively. Nonetheless, this was not sufficient to cushion the softer incomes from Malaysia (-13.3%yoy to RM383.5m) and Indonesia (-14.1% to RM484.1m).

Overall demand deteriorated due to Covid-19. Due to lower sales in its major markets, LHI also recorded a steep decline in EBITDA margin for its livestock and poultry segment at 0.77% vs 13.8% in 1QFY19. Although the EBITDA of feedmill operations improved 40.2%yoy to RM119.4m, it was not enough to cushion the steeper - 94.9%yoy plunge in the EBITDA of livestock and poultry EBITDA to RM6.0m. The dismal performance at its livestock and poultry segment can be attributed to the Covid-19 pandemic, which dampen overall demand for its products hence resulted in lower selling prices. Despite the upcoming Raya festive season that is celebrated in Indonesia and Malaysia, we expect softer on-year performance due to a more cautious sentiment amid this pandemic.

Impact to earnings. As we think that Covid-19 may continue to impact overall demand for the livestock and poultry, we revised our FY20E and FY21F earnings forecasts downward by -27.2% and -9.7% to RM137.5m and RM185.9m respectively as we lowered our assumptions on the ASP of the group’s products.

Target price. We revised our target price to RM0.60 (previously RM0.82) per share, pegging its FY20F EPS of 3.8sen to target PER of 15.8x. Our target PER, which is based on the FY20 market cap weighted average PER of LHI’s regional peers, is unchanged.

Maintain NEUTRAL. The livestock business is a high-volume, low-margin business as the products can be regarded as a commodity hence subjected to vagaries in demand and supply dynamics. The subdued ASPs for broiler’s DOC, chicken and egg were not only impacting LHI but the whole industry players. The impact to LHI is more significant as it is a pure-play poultry producer as compared to some of its bigger competitors which have ventured into other businesses apart from poultry. While we believe that the industry outlook may be challenging in the near-term, we recognise that poultry is a staple commodity and also one of the cheaper sources of protein. Hence, we think that demand may eventually recover. We opine that LHI’s earnings will be supported by: (i) economies of scale; (ii) vertical integration; and (iii) geographical diversification. All things considered, we maintain our NEUTRAL call on the stock.

Source: MIDF Research - 20 May 2020