Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on September 3, 2019

Leong Hup International Bhd
(Aug 30, 83.5 sen)
Maintain buy with an unchanged target price (TP) of RM1.36:
Leong Hup International Bhd’s first half of 2019 (1HFY19) results were broadly within expectations in anticipation of stronger quarters ahead. This is judging mainly from the sharp recovery in product prices in Malaysia. Over the longer run, sustainable growth would be underpinned by capacity expansion and robust consumption of poultry products.

Selling could have been overdone with the stock now trading at 11 times its forecast financial year ending 2020 (FY20F) price-earnings ratio, or a steep 35% discount to regional average.

Leong Hup reported 1HFY19 core net profit of RM78.7 million (-38.5% year-on-year [y-o-y]), which accounted for 39%/37% of our/consensus forecasts. Note that average broiler and day old chicks’ prices in Malaysia surged 32% and 44% so far in the third quarter of 2019 (3Q19) versus 2Q19 average. Post results, we make no changes to our earnings forecasts and discounted cash flow-derived TP of RM1.36.

Y-o-y, 1HFY19 revenue grew 7.7% to RM3 billion, mainly driven by robust growth in Indonesia and Vietnam, while Malaysia sales fell marginally due to weak product prices in 2Q19. By business segment, a jump in feed mill sales on the back of favourable pricing and capacity expansion has more than offset the weakness in livestock division on softer product prices.

Meanwhile, 1HFY19 earnings before interest, taxes, depreciation and amortisation (Ebitda) inched up 1% to RM330.4 million, thanks to a higher contribution from Indonesia and Vietnam. Similarly, the feed mill division has also chipped in to the higher Ebitda in 1HFY19, underpinned by higher sales and margin expansion. The group declared a dividend per share of 1.6 sen.

As we believe the market had priced in the moderate 2QFY19 results, hence the depressed share price, it ignored the high possibility of a turnaround in 3Q19 that should stem from the recovery in product prices, particularly in Malaysia.

In addition, the high base effect in Singapore should wear off from 3Q19 onwards. To recap, the group disposed of a subsidiary in Singapore on 30 June, 2018, which resulted in a loss of revenue.

Nonetheless, price fluctuations are inherent in the poultry industry, and investors should be focused on the longer-term growth prospects of the company instead. This is likely to be underpinned by capacity expansion across operating markets, the robust consumption of poultry products as the cheapest source of protein, and its religious neutrality. A potential near-term catalyst would be a sharp earnings rebound in 3QFY19.

Risks to our recommendation include unfavourable changes in regulatory policy, and supply demand dynamics. — RHB Research Institute, Aug 30

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