This article first appeared in The Edge Financial Daily on September 10, 2019

KUALA LUMPUR: Leong Hup International Bhd is hoping for a quick turnaround after suffering a 76% plunge in second-quarter (2Q) net profit, but there are some doubts due to a chicken meat glut in Indonesia.

While some analysts do not expect the glut, that has brought down chicken prices to a three-year low, to significantly impact Leong Hup, others have voiced concerns.

Leong Hup is the region’s leading fully integrated producer of poultry, eggs and livestock feed, with operations in Malaysia, Singapore, Indonesia, Vietnam and the Philippines.

InterPacific Securities research head Pong Teng Siew expects the chicken glut to hit Leong Hup’s profitability. However, he said it is hard to quantify the impact as there is no official information from the company.

He described the action taken by the Indonesian government as drastic. “I did not expect them to take such drastic action. Since it is a drastic move, this would be able to resolve the oversupply issue quickly,” Pong told The Edge Financial Daily.

Another analyst who tracks the company said the impact of the glut will be minimal on Leong Hup as its main revenue contributor in Indonesia is the feed mill business, and not livestock.

“In Indonesia, 70% of the contribution is from the feedmill business,” the analyst told The Edge Financial Daily. “Livestock sales are contributing only about 11% to Leong Hup’s total sales number, so the impact will not be big.”

“Hence, I am still keeping the ‘buy’ call for Leong Hup,” said the analyst who asked to remain anonymous.

The analyst noted that despite the lower market prices for its broiler day-old chicks, Leong Hup’s performance in 2Q ended June 30, 2019 (2QFY19) was buoyed by increased sales volume across all its product segments.

As such, the analyst anticipates a better second half (2H) for the company as demand for its products remain stable.

Indonesia is Leong Hup’s largest geographical segment, contributing 37.92% or RM1.13 billion to the group’s total revenue of RM2.98 billion in 1H of 2019.

Earlier this month, the Indonesian government asked poultry breeders to destroy 10 million eggs — or give them away — in a bid to support falling chicken prices.

This follows an order in June to cull parent-stock chickens that are older than 68 weeks to ensure breeders fetch good prices for their flocks.

The average retail price of chicken meat has fallen 25% this year to 30,050 rupiah (RM8.94) per kg, the lowest since July 2016, according to official figures.

Indonesia’s agriculture ministry data showed that the country produced 3.6 million tonnes of chicken meat in 2018, but only consumed 3.1 million tonnes, representing a surplus of 500,000 tonnes.

As at press time, the management of Leong Hup has not responded to The Edge Financial Daily’s request for comment.

But the group’s chief executive officer Tan Sri Lau Tuang Nguang stated previously that Leong Hup’s earnings are expected to improve in 3QFY19 after the dismal showing in 2QFY19.

The poultry group’s net profit plunged 76% to RM16.09 million in 2QFY19 from RM65.66 million in the previous corresponding quarter. Revenue, however, grew 4% to RM1.48 billion from RM1.42 billion.

Leong Hup had earlier issued a profit guidance warning of a “significantly lower” profit for 2QFY19 due to a sharp decline in the average selling price of most of its products, particularly in Malaysia, despite higher volume sales.

“We believe that the strength of our geographical diversification as a fully integrated producer of poultry, eggs and livestock feed, together with strict cost control policy will position us well for long-term growth,” Lau said in a statement.

Malacca Securities Sdn Bhd senior analyst Kenneth Leong expects the chicken prices to recover going into the year end and early 2020 as poultry players will opt to cull their earlier age chickens to rebalance the demand-supply condition.

Leong agreed that Indonesia’s call to its poultry players to discard 10 million eggs will have only a minor impact on Leong Hup’s Indonesian business.

“This will just have a minor impact given that should all 45 poultry breeder players collectively dump 10 million eggs and the average number of eggs per poultry player will amount to about 200,000.

“As of 2018, Leong Hup’s Indonesia operations sold more than 40 million eggs. This means that it would impact less than 0.5% of Indonesia operations in the egg segment,” he said.

Leong said the downside risk on Leong Hup’s share price is minimal as weakness in the price since the company’s listing on May 16 has already been priced in the downside of 2QFY19.

“Going forward, we expect Leong Hup’s shares price to rebound backed by the improved number of chickens sold, particularly in Vietnam and the Philippines,” said Leong, adding that Malacca Securities is maintaining its “hold” call with an unchanged target price (TP) of 82 sen for the counter.

According to Bloomberg, of the analysts who track Leong Hup, four have a “buy” call and one has a “hold” call, with the TP ranging from 88 sen to RM1.36.

The counter has been trending lower since its debut on Bursa Malaysia with an initial public offering price of RM1.10. It had fallen to as low as 72 sen before recovering. The stock closed at 81.5 sen last Friday, valuing the company at RM2.98 billion.

Areca Capital Sdn Bhd chief executive officer Danny Wong Teck Meng said Indonesia’s action was akin to “killing a golden goose”.

He said the act of killing future chicken to support current chicken meat prices, may be feasible in the short run in tackling the excess supply issue, but is not a right thing to do in the long run.

Wong noted that the livestock and poultry business is “high risk” as it is affected by incidents that are beyond human control, such as bird flu.

Furthermore, with the rise of plant-based meat in overseas markets, Wong said the industry may face challenging times in the future.

For instance, he said the rapid growth of the alternative protein market has seen the share price of US company Beyond Meat rising by more than six times from its listing price of US$25 on May 2.