Investment Highlights

• We downgrade Leong Hup International (LHI) to HOLD (from BUY) with a lower fair value (FV) of RM0.50/share (from RM0.72/share) based on revised 2022F EPS with an unchanged target PE of 17x. We cut 2022F by 31% and 2023F by 14%, mainly to account for higher feed costs.

• LHI’s 1QFY21 core net profit of RM20mil (-54% QoQ, -71% YoY) accounted for 13% of our FY22F earnings and 12% of consensus. The earnings fell short of our and street’s expectations. The earnings gap was mainly attributed to a weaker-than-expected operating margin due to high feed costs. This is despite reporting a stronger revenue of RM2,087mil (+15% QoQ, +25% YoY).

• LHI’s sequentially stronger revenue (QoQ, livestock: +9% feed mill: +24%) was mainly driven by higher sales volume and ASP of broiler and day-old chicks (DOC). Higher sales volume of livestock feed in Indonesia also contributed to the improvement in sales.

• However, the livestock segment’s EBITDA margin declined 1.7% points while that of feed mill fell 2.2% points sequentially due to the high raw material costs, resulting in lower earnings.

• YoY, all LHI’s operating countries reported improvement in sales, contributing to a 25% increase in the group’s revenue. Notwithstanding the higher sales, the livestock segment’s EBITDA plunged 63% YoY, dragged down by the elevated input costs.

• Despite positive signs of sales recovery premised on returning demand from hotels, restaurants and cafés as the economy reopens, we believe the elevated input costs are likely to cap LHI’s earnings recovery potential.

• The government’s decision to ban the export of chickens starting 1 June might negatively affect LHI’s operation in Singapore which sourced its chicken from Malaysia’s farms.

• Key rerating catalysts are the expansion of its downstream business-to-consumer channel to other operating countries beyond Malaysia and the normalisation of raw material prices.

• The stock is currently trading at -1.5 SD of its 3–year historical average. We believe this is justified given the limited near-term earnings upside potential due to the elevated costs and low chicken ceiling price.

Source: AmInvest Research - 25 May 2022