We came away from Leong Hup International Bhd (LHI) virtual analyst briefing with the following key takeaways:

i) Indonesia Remains as the Key Contributor

ii) Chicken Price Increased while Egg Subsidy Remains

iii) Future Operational Capex Plans are in Place

Maintain Buy with a revised target price of RM0.71/share (previously: RM0.67/Share), based on 9x CY25 EPS (k: 6.4%; g: 3.0%).

Indonesia Remains as the Key Contributor

Indonesia significantly bolstered LHI’s topline in 1QFY24, contributing for 40.5% (+4.9%-pts) of the group’s total revenue of RM2.4bn. The improved performance was mainly driven by the higher sales volume of Day-old-chicks (DOCs), broiler duck, and increase in the average selling price (ASP) of broiler chickens. The ASP of DOCs has increased to RM2.40/each from RM1.70/each, while broiler chicken rose to RM6.05/kg from RM5.90/kg in 1QFY24. As a result, LHI saw an improvement in EBITDA margin, rising 3%-pts QoQ and 10.5%-pts YoY to 6.8% in 1QFY24. Moving forward, we foresee that the profitable performance driven by higher ASP and resilient demand from Indonesia will offset the normalise outlook for its operations in Malaysia.

Chicken Price Increased While Egg Subsidy Remains

The subsidy for eggs remains in place while the price of chicken has increased following its removal. Broiler chicken and DOCs prices in Malaysia have risen to RM6.50/kg (from RM5.90) and RM2.50/each (RM2.20/each), respectively due to the floating price mechanism. Management guided that the egg subsidy is still in place at this juncture, and there are 2 possible structures for its removal: i) Reduce the subsidy amount and increase the ceiling price, and ii) If commodity prices reduce substantially, it may lead to the fully removal of egg subsidy. Currently, the subsidy for eggs remains at RM0.10/piece regardless of grading.

Future Operational Capex Plans Are in Place

Capex of RM200-300mn is slated for FY24. Currently, the waste water treatment plant in Serang Layer, West Jawa, Indonesia is 80% completed with an estimated expenditure of RM1.8mn upon project completion in the home country. The slaughtering plant at Yong Peng with a projected production capacity of 24,000 birds per day is still in the pipeline and targeted for completion by 3QFY25. Moving forward, the group aims to emphasise further downstream expansion (processing and B2C channel) while optimising capex.

Impact

We tweaked our FY24-26 earnings upwards by 4.2% to 6.7% after increasing our revenue assumptions by 4.1% to 5.6% for FY24 to FY26.

Valuation

We reiterate our Buy recommendation with a revised target price of RM0.71/share (previously: RM0.67/Share) based on 9x CY25 EPS.

Source: TA Research - 4 Jun 2024