We re-rate LAYHONG to “Not Rated” with a fair value of RM0.480. High volatility in the egg segment has dragged performance, which we believe could spill over into the nearterm and undermine sentiment. Still, launching of the NH Foods plant in Pulau Indah could positively translate into long-term profitability. At the meantime, management will continue to invest to expand its capabilities across segments.

Shaken by volatile market forces. In its 1Q19 results, the group generated sales of RM199.3m (+9% YoY) but only saw a PATAMI of RM2.3m (-48% YoY). This is in spite of FY18 solid top-line and bottomline performance of RM840.4m (+24% YoY) and RM36.9m (+101% YoY), respectively. We reckon recent profits were compressed by heavily depressed table egg prices (c.25% of group revenue) alongside inflated feed prices. Going forward, we believe sales could still expand on the back of a larger market share in processed foods and normalising egg prices. However, the disruption in cost structure could potentially spill over and drag into the coming quarters. Further, we believe that there may be reason to expect seasonal factors to be more volatile in the future (refer to overleaf for our commentary on the egg industry).

NH Foods rolling out. We recently attended the opening of the group’s NH Foods plant which is expected to commence production by end of this month. The facility’s full capacity is earmarked at 1.2k mt/month, increasing the group’s processed foods output by 60%, which could be achieved in the medium-term with the progressive installation of its production lines. Nevertheless, in the longer term, the plant could sufficiently support NH Foods and LAYHONG’s production requirements to export halal-certified products under their brands. This would be a new avenue of growth for the group, especially with the intent to supply to the 2020 Tokyo Olympics.

Finding a grip on sustainability. In efforts to improve the integration between business segments, the group looks to expand its capabilities in their liquid eggs and broiler segments, to be completed by end-FY19. In addition to supporting the group’s higher poultry food raw material demand, we believe the move would also reduce the group’s exposure to the volatility in the table eggs segment as processed foods operate with a more sustainable margin and cost structure. However, it appears that these benefits could only be seen in FY20.

With more conservative assumptions, we adjust our FY19E net profit assumptions by -42% to RM26.0m. This is mainly owing to our anticipation of a lower 1H19 dragged by significantly lower profit margins, to be compensated by a strong recovery in 2H19 as costs and prices normalise. In addition to an estimated sales growth of 12% growth, we aim for a 46% expansion in FY20E earnings to RM38.0m.

“Not Rated” with a fair value of RM0.480. In addition to the lower FY19E EPS, we also trim our ascribed valuations to 12.0x PER (from 17.0x, previously), which appears to be within the stock’s -2SD over its 3-year Fwd. average PER. We believe the new valuation is fair, as a reflection of the poorer sentiment from the stock following the 1Q19 earnings disappointment, which could have led the stock to a YTD change in stock price by -55%. Although our valuations had undergone a cut, the upcoming re-entry of Leong Hup into the stock exchange may lead to an expansion in industry’s valuation if investors deem the industry leader to be a fair industry benchmark after its listing.

Source: Kenanga Research - 22 Nov 2018