Leong Hup International Bhd
(Sept 20, 82.5 sen)
Initiate buy with a target price of RM1.10: Leong Hup International Bhd (LHI) is one of the largest fully integrated producers of poultry, eggs and livestock feeds in Southeast Asia, with operations in Malaysia, Singapore, Indonesia, Vietnam and the Philippines. Its operations can be classified into two major segments — feedmill and livestock segments.

 
LHI operates in the region with significant growth potential, underpinned by favourable age demographic and growing population, increasing affluence and disposable income, and significant growth potential in the consumption of proteins, in particular, poultry meat.

LHI is still in expansion mode in the near future, for which it has planned capital expenditure (capex) of RM437 million in financial year ending Dec 31, 2019 (FY19). This is aimed at strengthening its presence in Southeast Asia, in particular, the five markets it operates in.

Besides, we note that LHI is exploring the Cambodian market through livestock imports, and may enter production there in the future when it sees sufficient demand from local customers.

The primary raw materials for LHI’s feedmill business are corn and soybean meal.

We note that prices of both corn and soybean meal have eased since July 2019. Lower feed prices augur well for livestock production cost, as feed is the main cost component in producing livestock.

LHI is the largest integrated poultry producer in Malaysia and among the top three integrated producers in Indonesia and Vietnam.

The sheer production size gives LHI an advantage over smaller competitors in the sourcing of raw materials, production and distribution of poultry and livestock feeds.

The integrated business model provides LHI with significant competitive advantage over other non-integrated players in terms of operating flexibility and resilience.

We project a core net profit of RM194.2 million in FY19 (-11.6% year-on-year), as we expect LHI’s performance to recover in the second half of 2019 (2H19) (1H19: -35.6%), underpinned by a recovery in livestock prices in Malaysia and Indonesia, and higher livestock and feedmill sales volume.

We project FY20 to FY21 core net profit to increase by 15.1% to 15.2% to RM233.5 million and RM257.5 million, underpinned by higher livestock and feedmill sales volume, arising from capacity expansion.

At its current share price of 80.5 sen, we believe LHI’s weak performance in the second quarter of 2019 (2Q19) has already been more than reflected in its recent share price performance (which has plunged 26% since initial public offering (IPO) listing). We expect LHI’s performance to recover considerably in 2H19, underpinned by a strong recovery in broiler and day-old chick prices in Malaysia and Indonesia; as well as higher capacity in both the feedmill and livestock segments. — Hong Leong Investment Bank Research, Sept 20