This article first appeared in The Edge Financial Daily on August 14, 2019
Leong Hup International Bhd
(Aug 13, 80 sen)
Maintain buy with a lower fair value (FV) of RM1.17: We cut Leong Hup International Bhd’s financial year ending 2019 to 2021 (FY19–FY21) net profit forecasts by 11.1%, 9.1% and 8.7% to RM214 million, RM236.8 million and RM256.7 million respectively.
Our earnings downgrade is in response to the company’s announcement on Bursa Malaysia dated Aug 9, 2019 that the management expects a significantly lower net profit for the second quarter of financial year 2019 (2QFY19) compared with that for 2QFY18 due to a significant decline in average selling prices (ASPs) for most of the products sold by Leong Hup, particularly in Malaysia.
Nonetheless, the stock still offers a potential upside of 38%, hence we are maintaining our “buy” recommendation.
Leong Hup’s broiler day-old chicks’ (DOC) ASP in Malaysia in the second quarter of 2019 (2Q19) was RM1.21 per DOC, a 38.6% decline from RM1.97 per DOC in 2Q18. The selling price of broiler DOC in Malaysia tumbled to 90 sen per DOC in 2Q19. In comparison, the lowest selling price of the group’s broiler DOC in 2Q18 was RM1.60 per DOC.
For broiler chickens in Malaysia, the ASP declined 14.7% to RM3.99 per kg compared with RM4.68 in 2Q18. The selling price of broiler chickens in Malaysia declined to RM2.60 per kg in 2Q19. In comparison, the lowest selling price of broiler chickens in 2Q18 was RM3.90 per kg.
However, market prices of broiler DOC and chickens increased to RM2 per DOC and RM5 per kg respectively on Aug 5, 2019. The management also guided the group’s operating costs are relatively stable, while sales volume remains on an uptrend.
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. We reckoned the long-term outlook for Leong Hup remains positive given a stable demand for chickens, while its incomes from Singapore, Vietnam, Indonesia and the Philippines will provide growth potential for the group. — AmInvestment Bank, Aug 13