• Maintain BUY and MYR0.63 TP, 12% upside and c.3% yield. 1Q23 results missed expectations due to a weak showing in Indonesia. We expect earnings to pick up towards 2H23F on improving market conditions. Essentially, we believe the challenging operating environment in the past two years will strengthen Leong Hup International’s market share and further consolidate its presence in the operating markets. With its continuous capacity expansions, LHIB is well positioned to capture the robust poultry consumption in the ASEAN region.

• 1Q23 results were below expectations. Core net profit of MYR22m (+9% YoY) met only 10-11% of our and Street’s estimates. The negative deviation could be attributed to the weaker-than-expected performance of the Indonesia operations. Post results, we trim FY23F earnings by 8% but keep FY24F-25F earnings unchanged. As a result, our DCF-derived TP stays at MYR0.63 (inclusive of a 4% ESG discount), which implies 12x FY23F P/E, or below its 4-year mean of 13x.

• Results review. YoY, 1Q23 revenue grew 5% to MYR2.2bn with all operating countries chalking up encouraging growth except for Indonesia, which was affected by depressed product ASPs and unfavourable demand- supply dynamics. Correspondingly, 1Q23 EBITDA jumped 13% to MYR152m with margin expanding by 0.5ppts to 6.9% on better cost pass- through. QoQ, 1Q23 revenue was 5% lower, largely on account of the softer numbers from Malaysia and Vietnam, on the back of normalisation of product ASPs and sales volumes from the strong 4Q22 base. Meanwhile, 1Q23 group EBITDA slumped 43% QoQ mainly dragged by the negative contribution from Indonesia, as the unfavourable market conditions made it difficult for the group to pass on the elevated costs.

• Outlook. Notwithstanding the slow start to FY23F, we anticipate the earnings momentum will pick up towards 2H23F. This is taking into account the easing commodity price trend, ASP recovery in Indonesia, improving exports to Singapore, as well as the relatively stable Malaysia operations. On top of that, the toned down intervention by governments generally to manage food inflation will bode well for LHIB to better mitigate cost fluctuations. Risks to our recommendation include a sharp rise in input costs and unfavourable supply-demand dynamics.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 1 Jun 2023