Key takeaways from the virtual analyst briefing:

i) GP margin is expected to be enhanced backed by easing in maize and soybean cost ;

ii) Normalised chicken export activity to Singapore;

iii) Resilient demand towards poultry products in 2HFY23. We reiterate Buy and unchanged target price at RM0.60/share based on 10x CY24 EPS.

GP margin is expected to be enhanced by easing in maize and soybean cost

Leong Hup International Bhd (LHI) is expected to benefit from an improved cost structure, primarily due to the reduction in maize and soybean costs. Notably, soybean meal costs have decreased from c.USD464.2/ton in March 2023 to c.USD397.3/ton as of June 2023; while the corn costs have declined from c.USD 657.75 as of March 2023 to c.USD554.5/Bu as of June this year. Both of these raw input made up 70% of the COGS. Additionally, we gather that the Malaysian government plans to introduce measures to boost corn plantation yields by 50% in the upcoming Budget 2024. We believe that these developments, along with the declining key input costs, will enhance the overall cost structure and create a more stable operating environment for poultry companies, shielding them from raw material cost fluctuations.

Normalised chicken export activity to Singapore

To recap, the Malaysian government imposed a ban on chicken exports to Singapore in July 2022, gradually easing the restriction to 50% of the previous export volume in October 2022. However, as of July 1 st this year, the export ban has been completely lifted, and LHI’s chicken exports to Singapore was fully normalised in August 2023. We anticipate that the resumption of chicken exports will accelerate LHI's business recovery in Singapore, driven by strong demand for chicken supplies.

Resilient demand towards poultry products in 2HFY23

The company maintains its confidence in the intact demand for poultry products throughout the 2HFY2023, with a specific emphasis on the strong consumer spending expected during the 4QFY23, attributed to the festive season. This assurance is grounded in the consistent consumer consumption patterns observed across the diverse geographical areas encompassed by LHI's client portfolio. These factors are anticipated to not only fortify but also sustain the demand for poultry products, consequently enhancing the company’s market positioning and revenue outlook in the forthcoming months.

Impact

No changes to our earnings forecasts.

Valuation

We reiterate Buy and unchanged target price at RM0.60/share based on 10x CY24 EPS

Source: TA Research - 1 Sept 2023