• Maintain BUY and TP of MYR0.63, 19% upside with c.3% FY23F yield. Leong Hup International’s 1H23 earnings met our expectations but beat the Street estimate. Looking ahead, we believe its earnings growth should be sustained, given the improved operating environment in key markets including Malaysia and Indonesia. We continue to like LHI, as we believe it is well-positioned to capture the robust poultry consumption in the ASEAN region, supported by its continuous growth in production capacity and market share.

• 1H23 results within our expectations, above the Street estimate. Net profit of MYR87m (+43% YoY) accounted for 48% and 55% of our and Street full-year forecasts. Post-results, we make no changes to our earnings forecasts and DCF-derived TP of MYR0.63 (inclusive of a 4% ESG discount, as LHI’s ESG score is two notches below the country median), which implies 13x FY23F P/E or close to the stock’s 5-year mean.

• Results review. YoY, 1H23 revenue grew 6% to MYR4.6bn, supported by healthy growth across all operating markets on the back of the broad reopening of economies. The Philippines market contributed the highest growth, as the group continued to expand its capacity in this newest market. Correspondingly, 1H23 EBITDA jumped 37% YoY to MYR391m, as strong contributions from the Malaysia market as a result of a sales volume recovery and aid from a government subsidy more than offset the softness in Indonesia and Vietnam, which in turn stemmed from challenging market conditions. 2Q23 revenue climbed 10% QoQ to MYR2.4bn, primarily driven by a better performance in Vietnam and Indonesia from improved market conditions. As a result, its Indonesia business managed to turn around in 2Q23, contributing EBITDA of MYR51m, compared with LBITDA of MYR29m in 1Q23.

• Outlook. We expect LHI’s encouraging earnings growth to continue, as we believe the turnaround in Indonesia is sustainable – given the more balanced supply-demand dynamic in that market. In addition, the stable consumption and subsidy programme in Malaysia, which is a key contributing market, should also lend further support to drive earnings growth. These, together with the margin recovery from the cost pass through in the Singapore market, compels us to believe that the impact of the challenging business environment in Vietnam can be mitigated. On top of that, the favourable feed cost trend should also bode well for the group’s profitability going forward.

• Downside risks to our recommendation include a sharp rise in input costs and unfavourable supply-demand dynamics.

Source: RHB Securities Research - 30 Aug 2023