• Still NEUTRAL, new MYR0.78 TP from MYR0.74, 6% upside. FY23 results beat expectations on better-than-expected margins. Whilst we expect the easing feed costs to support the near-term earnings outlook, it may not be enough to propel earnings growth ahead from the exceptional FY23 base. We opt not to stretch our valuation further after considering the uncertainties brought about by the ongoing geopolitical tensions and volatility in the Indonesia market. In addition, further selling pressure from a private equity shareholder (6.2% stake) could cap the share price upside.

• Leong Hup International’s FY23 results were above expectations. Core earnings of MYR324m (+59% YoY) accounted for 111-115% of our and consensus forecasts. The positive deviation could be attributed to the stronger-than-expected margins on the back of easing raw material costs and favourable industry dynamics. Post results, we raise FY24F earnings by 14% and roll out FY26F earnings (-2% YoY). Correspondingly, our DCF-derived TP rises to MYR0.78. We take this opportunity to bake in a higher ESG discount of 8% on a lower ESG score of 2.6 vs the 3.0 country median for a lack of emissions disclosure. TP implies 11x FY24F P/E, close to the stock’s 5-year mean.

• Results review. YoY, FY23 revenue grew 6% to MYR9.5bn, with most key operating markets recording positive growth thanks to improvements in market conditions, ie a more balanced demand-supply dynamics. As a result, FY23 EBITDA jumped 36% to MYR1bn, with Malaysia operations contributing the most spectacular growth (+62%) on favourable ASPs and government subsidies. Meanwhile, the feedmill segment benefitted from the fall in commodity prices and reported FY23 EBITDA growth of 46% YoY to MYR707m, with margins expanding to a record high of 16.2%. QoQ. 4Q23 revenue fell 4% to MYR2.4bn on a weaker Indonesia showing, dragged by lower ASPs. Correspondingly, 4Q23 core net profit fell 22% QoQ to MYR104m.

• Outlook. Whilst the elevated feedmill margin should taper – with the cost savings to be passed through to customers progressively – the lower feed costs will bode well for the livestock division, in our view. Additionally, we gather that market conditions in Indonesia and Vietnam have improved – this should mitigate the shortfall in earnings from Malaysia operations, which are likely to normalise from the high base, as most of the subsidies have been booked. Meanwhile, the Philippines market should continue to grow rapidly from low base, underpinned by capacity expansion and market penetration.

• Risks to our recommendation include a sharp rise in input costs and unfavourable supply-demand dynamics.

Source: RHB Research - 28 Feb 2024