KUALA LUMPUR (Feb 8): Hong Leong Investment Bank (HLIB) Research has upgraded its rating for Leong Hup International Bhd (LHI) a to "buy" (from a "hold" earlier), given the improving near-term earnings prospects and more palatable valuation following recent share price retracement — which has declined more than 20% since six months ago.

The research house, however, maintains its target price of 76 sen for the group based on unchanged 18 times financial year 2021 (FY21) ending Dec 31, earnings per share of 4.2 sen.

In a note today, its analyst Chye Wen Fei said HLIB has turned more positive about the group's near-term earnings prospects on the back of the recent improvement in livestock prices in Malaysia and Indonesia — which will more than mitigate higher feed costs — and encouraging performance improvement at its downstream segment such as The Baker's Cottage (TBC).

Having surpassed the group's target of 80 TBC outlets by end-2020, Chye understands that HLI has achieved 105 TBC outlets thus far and is on track to achieve 150 outlets by end-2021.

"Apart from allowing LHI to partly mitigate the volatile poultry product prices (by shifting a portion of its broiler supply from conventional wholesale market into ready-to-eat poultry products, i.e. roasted chicken directly to end consumers via TBC outlets), we understand that this marketing strategy has also boosted sales of its bakery products, which carry more superior margins relative to its ready-to-eat poultry products, which in turn helps stabilising earnings at Malaysian operations over the longer term," noted the analyst.

Despite having anticipated margin normalisation at the feedmill segment to continue in the near term — due to feedmill capacity expansion in Vietnam — Chye believes bottom line contribution from the segment will remain stable going forward as lower margin will likely be mitigated by higher sales volume in Vietnam.

At the time of writing, shares of LHI had fallen half a sen or 0.73% to 68 sen, valuing the group at RM2.5 billion.