This article first appeared in The Edge Financial Daily on February 21, 2020

Leong Hup International Bhd
(Feb 20, 75 sen)
Maintain buy with a lower fair value (FV) of 89 sen: We maintain our “buy” call on Leong Hup International Bhd (LHI) with a lower FV of 89 sen. We cut our earnings forecasts for the financial year ending Dec 31, 2020 (FY20), FY21 and FY22 by 9.1%, 9.4% and 5.9% respectively to account for soft selling price expectations.

We roll over our valuation from FY20F (forecast) to FY21F earnings per share, now pegged at a lower price-earnings ratio of 15 times, from 18 times previously, to reflect tougher market conditions.

Key takeaways from LHI’s teleconference include the following: i) its FY20 and FY21 performances are expected to be driven by sales volume growth in emerging markets; ii) the group expects near-term consumption patterns to be disrupted by Covid-19; and iii) raw material prices could see downward pressure from uncertainties in the global economic outlook.

The group expects its FY20 performance to be driven by sales volume growth for its overseas operations. Its operations in Vietnam enjoy higher selling prices of day-old chicks, broiler chickens and livestock feed on the back of heightened demand for chicken meat.

Consumers in Vietnam substituted pork with chicken meat after supply fell due to swine fever. Moving forward, we expect the selling prices of poultry-related products in the country to remain strong due to the shortage of pork.

The brunt of the impact of Covid-19 is expected to be felt by the group’s Singapore operations, which are already facing soft poultry-related demand. We reduce our selling price expectations for Malaysia and Singapore by 5–10% in our earnings model to reflect the softer outlook.

The group typically purchases raw materials two to three months ahead. However, its feed mill segment is a cost-plus business and changes in input cost are usually passed on to customers.

Nonetheless, we still expect the drop in raw material prices to benefit the group during the time lag of one to two months, which would mitigate slightly the expected pressure on margins from depressed selling prices in the near term.

We believe the long-term outlook for the group is positive due to stable demand for poultry as a staple product and strong long-term earnings growth underpinned by expansion of the feed mill and livestock businesses in Malaysia, Vietnam and the Philippines. — AmInvestment Bank, Feb 20