• Maintain BUY and TP of MYR0.61, 24% upside with c.3% FY22F yield. Leong Hup International’s 9M22 results strongly beat forecasts, thanks to a strong recovery in its sales and margins. Beyond the prospects of a near- term earnings rebound, we continue to like LHI as a major proxy to capture the growth of consumption in ASEAN – thanks to its established market presence, operational efficiency and continuous capacity expansion to expand market share. The stock’s market valuation is undemanding – it is trading at levels well below the 3-year mean.

• LHI’s 9M22 results are above expectations. Core net profit of MYR128m (+170%) accounted for 88% of our and 108% of Street full-year estimates, on LHI’s stronger-than-expected sales and margin recovery. Post-results, we raise FY22F earnings by <15% but keep FY23-24F forecasts materially unchanged. Our DCF-derived TP also stays at MYR0.61 ((inclusive of a 4% ESG discount), implying 13x P/E FY22F – below its 3-year mean.

• Results review. YoY, 9M22 revenue jumped 26%, with all operating countries contributing positive growth on the back of a consumption recovery and higher ASPs where LHI passed on the spike in production costs. Its Malaysia business still booked robust earnings growth, with 9M22 EBITDA surging 89% YoY to MYR234m from the solid volume recovery and further aided by government subsidies stemming from the enforcement of the ceiling price. Meanwhile, Vietnam overtook Indonesia as the second largest EBITDA contributor, following the broader reopening of domestic economies and continuous capacity expansion. Its newest market, the Philippines, also reported encouraging EBITDA growth (+62%). QoQ, 3Q22 revenue grew by 4% to MYR2.4bn, mainly driven by Vietnam and Indonesia – which more than offset the weakness in its Singapore business (due to a ban on exported poultry products imposed by the previous Malaysian Government). However, EBITDA rebounded sharply by 81%, thanks to the margin recovery in Indonesia in light of stronger selling prices.

• Outlook. We believe the strong earnings recovery momentum should be sustained going forward into 4Q22F, in view of the seasonal demand and in reflection of the lower feed costs. That said, we understand that the operating environment in Indonesia has remained challenging and should continue to drag earnings, thereby offsetting some of the growth from other markets. Looking further ahead, less volatile – albeit elevated – commodity prices should bode well for poultry operators including LHIB, as it would help to facilitate cost pass-throughs. This, on top of the expectation of a further normalisation in consumption and LHIB’s continuous capacity expansion, leads us to project FY23 earnings to grow by 18% YoY.

• Downside risks to our recommendation include a sharp hike in commodity prices and unfavourable regulatory changes.

Source: RHB Research - 30 Nov 2022