• Maintain BUY, with higher TP of MYR0.84 from MYR0.82, 43% upside and c.4% FY24F yield. Leong Hup International’s 1H24 results beat expectations on better-than-expected profit margin. Its near-term earnings outlook is promising considering the fall in commodity prices, weakening USD and favourable demand-supply dynamics in key markets. Meanwhile, we understand that the private equity shareholder has completely exited which should remove the share overhang. As such, the current valuation is attractive, at below its 5-year mean.

• LHI’s 1H24 results were above expectations. Net profit of MYR153m (+76% YoY) accounted for 53-55% of our and consensus forecasts. The positive deviation could be attributed to the higher-than-expected profit margin driven by favourable market conditions and easing input costs. Post-results, we raise FY24F earnings by 9%. Correspondingly, our DCF-derived TP rises to MYR0.84 (inclusive of an 8% ESG discount) which implies 10x FY24F P/E or close to the stock’s 5-year mean.

• Results review. YoY, 1H24 revenue grew 3% to MYR4.8bn primarily driven by robust growth in Indonesia (+13%) and the Philippines (+25%) on the back of better ASPs and rising sales volume. Meanwhile, 1H24 EBITDA surged 37% to MYR537m thanks to the significant turnaround in Indonesia on abovementioned factors as well as easing feed costs. In addition, Vietnam and the Philippines markets also registered encouraging growth thanks to improved market conditions and continuous market penetration. QoQ, 2Q24 revenue eased 2% to MYR2.4bn on lower ASPs with the lower feed costs gradually passed on to customers. That said, 2Q24 EBITDA jumped 36% to MYR219m which we believe is a function of declining input costs outpacing the lower ASPs.

• Outlook. We expect the strong momentum to sustain into 3Q24F with market conditions remaining favourable in Indonesia, Vietnam and the Philippines ie balanced demand-supply, lower input costs following the material drop in commodity prices including corn and soybean meals. The weakening of the USD should lend further support to margin expansion as a majority of the raw materials are imported except for Indonesia which has its own domestic corn supply. As such, all these should more than offset the lower contribution from Malaysia from the high 2023 base which was aided by the sizeable amount of government subsidies.

• Risks to our recommendation include a sharp rise in feed costs and unfavourable supply-demand dynamics.

Source: RHB Research - 28 Aug 2024