• Maintain BUY with higher MYR0.90 TP (from MYR0.84), 37% upside and c.4% FY25F yield. Leong Hup International’s 9M24 results beat expectations yet again on better-than-expected earnings margin. Conservatively, earnings may taper off from the high base due to a normalisation of market conditions. That said, we maintain our positive stance considering the more stable earnings trends and sturdier balance sheet. Trading at -1.5SD below its 5- year mean, valuation is attractive for a player with established regional presence to capture the resilient poultry consumption.

• 9M24 results above expectations for fifth consecutive quarter. Core net profit of MYR278m (+26% YoY) accounted for 90-91% of our and consensus’ forecasts due to better-than-expected profit margins, thanks to favourable supply-demand dynamics and lower feed costs. Post results, we raise FY24- 26F earnings by 22%, 20%, and 13%. Correspondingly, our DCF-derived TP rises to MYR0.90 (inclusive of an 8% ESG discount), implying 10x P/E FY25F or close to the 5-year mean.

• Results review. YoY, 9M24 revenue inched down by 2% to MYR7bn, reflecting the lower feed ASPs in tandem with the drop in commodity prices. That said, 9M24 EBITDA grew 14% to MYR846m, driven by strong recovery in the Vietnam and Indonesia markets on the back of lower feed costs, whilst the Philippines market continued to be the star performer with EBITDA contribution doubling YoY, underpinned by capacity expansion and deeper market penetration. QoQ, 3Q24 net profit surged 30% to MYR125m, spurred by the jump in Malaysia earnings that were aided by lumpy government subsidies of MYR37m. This was further supported by the robust growth in Vietnam and the Philippines on better profitability, which more than offset the weakness in the volatile Indonesia market.

• Outlook. We expect the elevated earnings to sustain into 4Q24F as market conditions and feed costs remain favourable in most of the operating countries. In addition, the effects of a weaker USD should flow through more materially in the coming quarters. We highlight that LHI’s earnings are now exhibiting a higher degree of stability, which could be a result of industry consolidation, with smaller industry players being gradually phased out due to competitive reasons. LHI is in a good position to capitalise further by expanding its capacity to gain market share, given its healthier balance sheet (net gearing of 0.55x as of 9M24 vs 0.79x in FY23) after years of deleveraging.

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

Source: RHB Securities Research - 27 Nov 2024