Investment Highlights

• We keep our BUY call on Leong Hup with a same fair value of RM0.74/share based on FY23F PE of 14x, at parity to its 5-year mean. This also reflects an unchanged neutral ESG rating of 3 stars.

• We made no changes in our assumptions following an analyst briefing yesterday. These are the key takeaways:
  • To recap, the group registered strong recovery in sales and margins during 9MFY22 results, buoyed by higher average selling prices and volumes. Better revenue was seen across all operating markets, including Malaysia (+23% YoY), Singapore (+4% YoY), Vietnam (+28% YoY), Indonesia (+29%) as well as Philippines (+96%).
  • Margin wise, annual EBITDA growth was the highest for Malaysia (+89%), followed by Vietnam (+74%) and Philippines (+61%). Only 2 operating markets bucked the trend: Singapore (-38%) and Indonesia (-22%). Singapore was mainly affected by export bans of chicken by Malaysian government whereas Indonesia was dragged down by oversupply issue.
  • YoY, group production of feedmill in 3QFY22 stood at 1,054,000 MT (+1%) with an average utilisation rate of 64% (+1.7%-point). Meanwhile, sales volume of group feed climbed 3.5% YoY to 669,800 MT.
  • On the other hand, supply volume of group broiler day-old chicks (DOC) increased 18% YoY to 145mil chicks, whilst broiler chicken volume rose 6% YoY to 38mil birds.
  • In terms of egg volume, the group sold 443mil eggs in the third quarter of the year, down 4% YoY due to the avian flu that has been affecting the chickens, which in turn hurt the numbers of eggs produced. However, management guided that the impact on the group is still manageable as the flu is common, being present for decades.
  • Management is also positive on 4QFY22 performance, with the stronger momentum likely to carry into FY23. We gathered that Leong Hup currently has a strong market share of 40% in the DOC parent stock against the backdrop of a consolidating local poultry industry.
• The subsidy for poultry producer currently stood at RM0.80/kg for broiler and RM0.10 per egg, which is slated to last until 31 December 2022. We take note that if the subsidy is not extended, the chicken ceiling price of RM6.00/kg would need to be removed altogether or increased significantly. This is because of the lower current market price vs. cost of production, that has led to the closure of smaller poultry producers in the country.

• Of the RM52m subsidy and grant recognised by the group in 9MFY22, RM51m came from the Malaysian government and RM0.5m from Singapore as job growth incentives to support employers to expand local hiring from September 2020 to March 2023. Since the chicken ceiling price added to the subsidy would be lower by than the market price currently, any removal of price caps should bring a positive earnings impact.

• The group currently trades at a compelling FY23F PE of 9.6x, hugely discounted from its 5-year average of 13.6x.

Source: AmInvest Research - 1 Dec 2022