Investment Highlights

• We reiterate BUY call on Leong Hup International (LHI) with an unchanged fair value of RM0.95/share, pegged to an unchanged FY24F P/E of 11x, in line with its 3-year mean. We make no adjustment to our neutral ESG rating of 3-star.

• Our earnings forecasts are maintained following an analyst briefing yesterday. These are the key takeaways:
  ➢ Management expects a lower contribution from livestock & poultry operations in the coming quarter. This is likely due to declining average selling prices for chickens impacted by weaker demand in certain countries.
  ➢ We understand that lower demand in Indonesia and Vietnam, is likely due to (i) weaker purchasing power impacted by slow economic recovery and inflationary pressures, and (ii) softer exports volume to other countries.
  ➢ The plant utilisation rate of LHI’s feed mill has improved to 66% in 3QFY23 vs. 64% in 3QFY22. Coupled with a decline in raw material costs, we expect margins to gradually normalise for the feed mill segment in upcoming quarters.
  ➢ Corn prices have dropped by 33% to USD456/bushel from the peak in April 2023. While soybean meal prices recently rebounded from the low at USD372/bushel in Oct 2023, it is still 3% lower YTD at USD449/MT currently. Even though the trend for prices could continue to be volatile, we believe that LHI can sustain margins by mostly passing through costs to customers given the government’s removal of chicken ceiling prices.
  ➢ Management invested in an RM18mil slaughtering plant at Yong Peng, Malaysia, expected to be completed by 3Q2025. Management also guided FY24F capex of RM200mil-RM300mil (vs. our FY23F-FY25F assumption of RM200mil) will be spent in Malaysia, Indonesia and Philippines. As we project FY25F net gearing to decline to 21% from 83% in FY23F on improving operating cashflows, any additional capex will likely be funded through external borrowings.

• We remain positive on LHI’s earnings outlook, underpinned by:
  (i) gaining more market share regionally, and
  (ii) capacity expansion plan.

• The stock currently trades at a compelling FY24F PE of 8x, below its 3-year average of 11x.

Source: AmInvest Research - 30 Nov 2023