KEY INVESTMENT HIGHLIGHTS

• 1HFY20 normalised earnings missed expectation
• 2QFY20 net profit improved 0.9%yoy to RM16.2m
• Earnings are likely to pick up in the coming quarters although recovery may be uneven across different markets
• FY20E earnings cut by 25.5% but FY21F earnings are unchanged
• Maintain NEUTRAL with a revised TP of RM0.80 (previously RM0.60)

1HFY20 normalised earnings missed expectation. Leong Hup International Berhad (LHI)’s core net income of RM38.0m made up only 27.7% of our full year estimates and 26.5% of consensus’. An interim dividend of 0.55 sen was announced, which is also below our full year forecast of 1.5 sen. The lower than expected results can be attributed to lower than expected operating margin.

2QFY20 net profit improved 0.9%yoy to RM16.2m even though revenue dipped by 3.5%yoy. This was mainly due to higher other income, lower finance costs as well as lower tax expenses. During the quarter, sales from Indonesia declined by 20.6%yoy to RM447.5m due to lower ASP and sales volume of day-old-chicks (DOC). Revenue from Singapore fell 3.7%yoy to RM182.7m. The decrease in sales from these two markets are offset by the higher revenue from Malaysia (+4.8%yoy to RM385.5m), Vietnam (+15.6%yoy to RM387.5m) and the Philippines (+33.4%yoy to RM22.3m). However, the unfavourable ASP and sales volume of DOC in Indonesia negatively affected its operating margin. On the other hand, the aquatic feedmill in Vietnam the group bought in March this year has contributed to higher sales in the country.

Sequentially, earnings fell 25.5%qoq due to sales that dipped by 0.6% compared to 1QFY20. This is primarily due to lower sales volume of livestock feed and broiler chickens in Indonesia. Subsequently, the lower contribution from Indonesia resulted in lower earnings.

Earnings are likely to pick up in the coming quarters although recovery may be uneven across different markets. We believe that ASPs should be stabilise for Malaysia and Vietnam in the coming quarters as number of new active Covid-19 cases are considerably low. On the flipside, we think that the recovery in Indonesia may be uncertain as the number of active cases in the Republic is still elevated. We note that ASPs for broilers are holding up well in Malaysia but the same cannot be said for Indonesia. As such we think that near-term blended ASP may be affected by the weaker performance in Indonesia.

Impact to earnings. We are revising our FY20E earnings estimates downward by -25.5% as we lower our assumptions on the blended ASP due to the varying degree of Covid-19 impact across the markets LHI are in. That said, we believe that a recovery in FY21F is very likely as due the quest to find cure for Covid-19 is sped up

Source: MIDF Research - 26 Aug 2020