We came away from LHI virtual analyst briefing with the following key takeaways:

1. Indonesia would remain the key contributor to LHI’s revenue growth.

2. Price experiences time-lag effect from the easing in raw materials.

3. Chicken Price Stabilised Post Removal of Subsidies

Maintain Buy with an unchanged target price of RM0.67/share based on 9x CY25 EPS (k: 6.4%; g: 3.0%).

Indonesia Remains the Key Contributors to LHI’s Revenue Growth.

The outlook about the poultry sector in Indonesia remains strong due to ease of oversupply in the market. To recap, the Indonesian government decided to conduct mandatory culling to intervene the chicken price as the market experienced excessive supply in 2H23. However, the government detached from its initial plan while reducing the quota for grandparent stocks, which are crucial for the supply chain as it will translate to lower production of DOCs and broiler chickens. At this juncture, the market supply and demand are stable, and we foresee market players would enhance profitability from the stable broiler chicken price based on the market demand and supply (Appendix 1).

Price Experience Time-lag Effect From the Easing in Raw Materials

The raw materials cost (Corn and Soybean) has been declining from the peak in 2022. 4QFY23 EBITDA margin represents a record high of 14.7% over the past 5 years. Moving forward, we expect the margin to sustain at c.14% for 1HFY24 bearing there is no significant surge in raw material price. Meanwhile, management guided the share of savings from feedmill cost decline will not be immediate. According to management, the EBITDA margin would normalise further to c.9.5% to 10% over the long term on stable market conditions.

Chicken Price Stabilised Post Removal of Subsidies

Management guided that the egg subsidies remain and there are no further guidelines from the government on the removal. With that, we foresee the subsidies would continue to support its PBT, albeit minimal. On the removal of chicken subsidy, the rise in ASP has softened to RM5.90/kg, below the previous ceiling price of RM6.00/kg, and we expect this to provide a stable EBIT in FY24.

Impact

No Change to Our FY24-26 Earnings Projections.

Valuation

We maintain Buy with an unchanged target price of RM0.67/share based on 9x CY25 EPS.

Source: TA Research - 29 Feb 2024