We came away from LHI’s company meeting feeling rest assured-about Budget 2024’s implications on LHI in the long run.

Key Takeaways From the Meeting Are:

• Poultry ASPs will be adjusted accordingly to offset the impact of

Subsidy Removal Amid Easing Essential Input Costs;

• Beneficiary of sticky demand with downsized competitor pool;

• More robust 2HFY23 results ahead.

We reiterate Buy with a higher target price at RM0.89/share based on recalibrated PER 13x CY24 EPS.

Poultry ASPs will be adjusted accordingly to offset the impact of subsidy removal amid easing essential input costs

The proposed removal of the price ceiling on chicken and eggs and the cessation of government subsidy on poultry products effective 1 November 2023 are positive to LHI as the company will regain its pricing power to protect its margins against unfavourable movements in feed costs and foreign exchange. Since 1 July 2023, the ceiling price for broiler chicken has been adjusted to RM9.40/kg with a subsidy of RM0.80/kg. However, the retail price for broiler chicken has dropped below the ceiling price due to the ease of feed costs, particularly corn and soybean, which have declined more than c.35% and 25%, respectively, from the peak in 2022 (Figures 1 and 2). This is positive to LHI since corn and soybean made up the key ingredients of feed mill for c.70% and 25%, respectively. Looking forward, we believe the improving operating environment would boost the groups’ FY23/24 earnings projections by 11%/14.3%, respectively, on the back of reducing feed mill costs for corn and soybean at approximately USD520/Bu and USD1080/Bu (previously USD560/bu and USD1400/bu), respectively.

Beneficiary of Sticky Demand With Downsized Competitor Pool

LHI is a beneficiary of resilient demand in the poultry space, thanks to the reduced number of competitors. We gather from management that the competitor pool has downsized as some smaller chicken farmers shut down their operations owing to operational deficiency due to a surge in production costs in 2022. Despite the softening in soybean and corn prices in 2023, it would take at least six to eight months to bring the new poultry production business to full operational level. Hence, we believe that LHI will capitalise on its prominent position as a vertically integrated poultry operator across its geographical portfolios to maximise profitability.

Stronger 2HFY23 Result Ahead

Against declining essential input costs and an improving operating environment, we anticipate LHI will experience more robust earnings growth in 2HFY23 compared to 1HFY23, driven by strong domestic consumption. Additionally, we understand that LHI is striving to expand its export sales to Singapore, particularly in response to the fully normalised export sanctions effective in July 2023. Besides that, the company is expected to maintain a positive sales trajectory in the Indonesia and Vietnam regions, following the double-digit QoQ growth recorded in the previous quarter on the back of robust demand for poultry goods.

Impact

We adjust upward FY23/24/25F’s earnings projection by 11%/14.3%/8.3%, respectively, reflecting improving operating conditions across the boards.

Valuation

We maintain Buy with an adjusted target price of RM0.89/share (from RM0.60/share) based on recalibrated 13x CY24 EPS in view of better pricing strategy and improving profitability in future.

Source: TA Research - 1 Nov 2023