This article first appeared in The Edge Financial Daily on August 14, 2019
KUALA LUMPUR: Leong Hup International Bhd’s share price lost its footing yesterday after the poultry group issued a profit warning last Friday. However, analysts tracking the stock remain upbeat on its long-term prospects, expecting earnings to recover soon.
Leong Hup fell 7.5 sen or 8.82% to 77.5 sen yesterday. It closed at 80 sen, down five sen or 5.9% with nearly 11.79 million shares changing hands. The stock, since debuting on Bursa Malaysia on May 16, has dropped 27% from its initial public offering price of RM1.10.
Analysts believe Leong Hup’s share price has factored in the expectation of weaker quarterly results.
“The valuation, no longer a premium, is more reasonable at the current level to reflect its earnings prospects,” said MIDF Research analyst Nabil Zainoodin.
MIDF Research is the only research house that has downgraded its call on Leong Hup to “hold” with a much lower target price of 88 sen, from RM1.34.
“The downgrade is due to the initial valuation premium that does not match earnings quality of the group. Previously, we had pegged Leong Hup’s target price (TP) at a premium price-earnings ratio of 24 times,” Nabil said when contacted.
According to Bloomberg, the poultry stock has four “buy” calls and one “hold”, with TPs from 88 sen to RM1.43.
Although the financial results for the second quarter ended June 30, 2019 (2QFY19) are expected to be weak, investment analysts expect the group’s profitability to improve gradually in subsequent quarters given prices of broiler day-old chicks (DOC) and chickens in Malaysia have recovered strongly since last month compared with that in the second quarter of this year.
“Having said that, bear in mind that [operations in] Malaysia contribute about 30% of the group’s total revenue. In the [profit-warning] statement, the group only mentioned about Malaysia, and we are not too sure about other regions. So, we have to wait for more clarification [from the group] when they call for a results briefing by the end of this month,” Nabil told The Edge Financial Daily.
Still, Nabil is expecting margins and profitability will improve gradually moving forward as the group has ongoing initiatives to lower the cost per unit of production coupled with a stronger average selling price (ASP) of broiler DOC and chickens amid an expected stable demand.
AmInvestment Bank analyst Thong Pak Leng is also positive about the long-term outlook for Leong Hup, saying stable demand for chickens coupled with operations outside Malaysia could provide strength to its growing potential.
“We believe this is a temporary problem as volatility in selling prices is beyond the management’s control; we shall remain cautious about price movements of broiler DOC and chickens,” Thong said in a research note distributed yesterday.
Last Friday, Leong Hup issued a profit guidance warning of “significantly lower profits after taxation” for 2QFY19 compared with that for 2QFY18. The lower earnings expectation is due to a sharp decline in the ASP of most of its products, particularly in Malaysia, despite higher volume sales.
Leong Hup’s profit warning has prompted some analysts to reduce their earnings estimates.
“We cut Leong Hup’s financial year ending Dec 31, 2019 to 2021 net profit forecasts by 11.1%, 9.1% and 8.7% to RM214 million, RM236.8 million and RM256.7 million respectively.
“Following the earnings revision, our fair value is reduced to RM1.17 from RM1.46 based on a price-earnings ratio of 18 times over FY20 earnings. Nonetheless, the stock still offers a potential upside of 38%, hence we are maintaining our ‘buy’ recommendation,” said Thong.
RHB Research analyst Soong Wei Siang said investors should be focused on the company’s longer-term growth prospects instead.
He added that Leong Hup’s prospects would be driven by capacity expansion across all its operating markets and the robust consumption of poultry products as the cheapest source of protein and its religious neutrality.
“A sharp 3QFY19 earnings rebound would be a near-term catalyst,” Soong said.