• BUY, with new MYR0.61 TP from MYR0.83, 20% upside. Leong Hup International’s 1Q22 results disappointed, as the sharp rise in production costs could not be passed on immediately. That said, we expect margins to normalise going forward, as costs are gradually passed on, and higher consumption – from the broader economic reopening – should also support a quick earnings rebound. We believe LHI is in a good position to capitalise on the regional consumption recovery and potential industry consolidation, judging from its well established presence and solid fundamentals.

• 1Q22 results below expectations. Core net profit of MYR20m (-71% YoY) met only 10-12% of our and consensus’ estimates, as the sharp spike in commodity prices could not immediately be passed on to its customers. Post results, we cut FY22F-24F earnings by 5-29%. Correspondingly, our DCF-derived TP drops to MYR0.61 (inclusive of a 4% ESG discount). The new TP implies 15x P/E FY22F – close to its 3-year mean.

• Results review. YoY, 1Q22 revenue jumped 25% on consumption recovery and higher ASPs to partially reflect the higher feed costs following the continuous rise in commodity prices. However, 1Q22 EBITDA fell 33% to MYR135m, with margin slipping by 5.5ppts, as the hike in commodity prices was too sharp (corn and soybean meal prices up c.30% QoQ) to be immediately passed on. As a result, most operating countries recorded material dips in EBITDA contributions. QoQ, 1Q22 revenue was 15% higher, but profitability was significantly dented by the hike in commodity prices which affected the livestock and feedmill businesses.

• Effects of cost pass-through to be seen going forward. Following the subdued start to the year, we anticipate a rebound in 2Q22F earnings, underpinned by the effects of the cost pass-through, and stronger consumption recovery from the better containment of the pandemic and the broader reopening of economies across its operating countries. In the longer run, we foresee a consolidation in the regional poultry industry, as the extremely challenging operating environment caused by the pandemic and cost inflation should phase out the financially weaker players. This paves the way for larger-scale regional operators with solid fundamentals and robust expansion plans like LHI to extend its reach and gain market share. Current valuation may suggest that most of the negatives are already priced in, and we think LHI’s presence should place it in a good position to capture the region’s poultry consumption recovery.

• Risks to our recommendation include further hikes in commodity prices and unfavourable regulatory changes.

Source: RHB Research - 25 May 2022