KEY INVESTMENT HIGHLIGHTS

• Leong Hup's 9MFY24 earnings came above expectation
• Revenue moderates amid weaker feedmill sales
• Strong core PATNCI despite softer revenue
• Revised FY24-26F core earnings
• Maintain BUY with revised TP of RM0.90 (from RM0.80)

Above expectation. Leong Hup International (LHI) chalked in 3QFY24 revenue of RM2.2b (-5.4%qoq; -11.4%yoy) and core PATANCI of RM163.1m (+29.5qoq, +4.5%yoy) which brought 9MFY24 core PATANCI to RM374.2m (+27.1%yoy). This came in above our full-year FY24 forecast and consensus at 107% and 124% of full-year expectations respectively. The variance against our forecast was largely due to the stronger than-expected margin resulting from the lower feed costs and weakening USD.

Dividend payout. In 3QFY24, LHI declared a second interim single-tier dividend of 1.45 sen per share, bringing 9MFY24's total dividend to 2.5sen.

Revenue moderates amid weaker feed mill sales. For 9MFY24, LHI recorded total revenue of RM7b, a minor decrease of -1.9%yoy. The livestock and poultry segment saw a slight year-on-year revenue increase of +2.7% to RM4b, driven by higher ASP and sales volume of DOC and broiler chicken in Indonesia and Philippines. However, this was offset by the feedmill segment, where revenue fell -7.3%yoy to RM3b due to lower average selling prices and weaker sales volumes in key markets like Indonesia and Vietnam.

Strong core PATNCI despite softer revenue. Despite the moderation in revenue, LHI's 9MFY24 core PATANCI surged +27.1%yoy to RM374.2m. This notable increase in profitability was driven by effective cost management, particularly in the livestock segment, which benefitted from lower feed prices and favorable foreign exchange movements against the USD. The group's core PATANCI margin expanded to 5.4% from 4.1% in the same period last year, while EBITDA margin grew by 0.6 ppts to 11%. Additionally, a government subsidy of RM46.3m helped boost EBITDA during the period.

Government Subsidies in 3QFY24. On a quarterly basis, the core PATACI gained by +29.5%qoq to RM163.1m. This growth was mainly attributed to a higher government subsidy of RM37.1m in 3QFY24 compared to RM14.5m in 3QFY23. Notably, the Malaysian government lifted subsidies for chicken effective 1 November 2023, although egg subsidies remain in place.

Earnings estimate revised upwards. Factoring in the strong set of results, our FY24-26F core earnings estimates are revised higher by +25%/+20%/+11% respectively, mainly to account for lower feed cost assumptions.

Maintain BUY with revised TP of RM0.90. Higher core net profit forecasts aside, we revise our TP to RM0.90 by (i) roll forward our valuation base year (from FY24F to FY25F), (ii) lower our target PER to 7.3x (by taking into account of its latest 2 year historical average PER). Correspondingly, we reiterate our BUY call on Leong Hup with a higher TP of RM0.90 based on revised 7.3x FY25 core EPS of 12.3 sen.

Outlook. We remain positive on LHI's outlook, driven by resilient demand for poultry products, with chicken continuing to be a staple food, and the global softening of livestock feed commodity prices, such as corn and soy, which will reduce raw material costs. Market conditions in key regions like Indonesia, Vietnam, and the Philippines are expected to remain favorable, with a balanced demand-supply dynamic and lower input costs following significant drops in commodity prices. Any weakening of the USD should further support margin expansion, as a majority of raw materials are imported, except for Indonesia, which benefits from its own domestic corn supply. With these tailwinds, we anticipate the strong momentum to persist in near term.

Downside risks are (i) greater-than-expected raw material cost, (ii) adverse regulatory changes, (iii) shortages of great- grandparent DOC, (iv) disease outbreaks and (v) intense regional competition.

Source: MIDF Research - 27 Nov 2024