Summary

• Leong Hup International Bhd’s (LHI) 3Q22 core net profit stood at RM67.3m vs. net losses of RM53.4m in the previous corresponding quarter, bringing a 170.3% surge in 9M22 core net profit to RM128.2m. The results came in above expectations, amounting to 106.2% and 107.6% of ours and consensus forecast at RM120.7m and RM119.2m, respectively. Key deviations were mainly due to a higher-than-expected contribution from the both poultry and feedmill segment.

• YoY, the bottomline turned positive due to a higher revenue from both livestock and poultry and the feedmill segments. For the poultry segment, all operating country contributed to a higher revenue except Singapore. Main contributors include Vietnam, Indonesia, and Philippines saw higher ASP and sales volume of poultry, leading to margin improvements. Meanwhile, the government subsidies also contributed to the improved bottomline. Also, feedmill segment saw better margin resulted from higher ASP and sales volume mainly in Indonesia.

• QoQ, the net profit improved 66.2%, mainly resulted from (i) revenue expansion due to higher ASP and sales volume of livestock feed in Vietnam, and (ii) higher ASP in Indonesia and Malaysia.

• Cost wise, soybean meal price rose 17.4% YoY to USD469.0/MT, while maize price climbed 12.0% YoY to USD260.1/MT due to persistent world’s supply concern. Despite a mild QoQ decline in soybean meal and maize futures due to softer demand and imports from China, we believe the feed price should remain at a high level over the near term owing to uncertainties over the supply situation.

• On 5th August 2022, LFM, a wholly-owned subsidiary of the company had received a Proposed Decision issued by the MyCC, premised on the allegation that LFM has engaged in agreements and/or concerted practices to fix the quantum of poultry. Still, LHI clarified that the proposed financial penalty and directions are not final.

• Outlook wise, as all the countries that the group operates in have resumed economic activities with minimal restrictions, demand have improved in both the poultry and feedmill segments, leading to the revenue expansion. Nevertheless, the high cost of materials and the attempts by governments to manage inflation may continue to create uncertainties on the group’s performance.

Valuation & Recommendation

• As the reported earnings came in above our expectations, we upgrade our FY22f and FY23f earnings forecast by 54.2% to RM186.1m and 25.4% to RM207.2m respectively. The earnings forecast takes into account the rising demand in all LHI’s operating countries for both poultry and feedmill segments.

• We upgrade LHI to BUY (from HOLD) with a revised target price of RM0.85 (from RM0.53) as we rolled over to FY23f earnings forecast. The target price is derived by ascribing a target PER of 16.0x to its FY23f EPS of 5.3 sen.

• Risks to our recommendation and forecast include the volatility of commodity prices. Any draught-driven supply shortage will increase the commodity prices and lead to margin compression for the group. Besides, the group may face further uncertainties arising from the government’s intervention to set a ceiling price on poultry products.

Source: Mplus Research - 30 Nov 2022