• Maintain BUY, with new TP of MYR0.72 from MYR0.63, 18% upside and c.3% FY24F yield. Leong Hup International’s near-term earnings outlook looks bullish in view of the improving market conditions in Indonesia and robust performance of its anchor operations in Malaysia. Meanwhile, we think industry consolidation could have been accelerated by the pandemic and hyper commodity inflation, facilitating market share gains for major players like LHIB. In addition, we foresee it capturing the growing demand for poultry products in the ASEAN markets with its continuous capacity expansion.

• Price control to be lifted. In Budget 2024, the Government announced the cessation of the ceiling price regulation and subsidy programmes for poultry products – including chicken and eggs. We believe this is neutral for the poultry industry and LHIB’s Malaysia operations, as we expect the ASP adjustments post price floatation to offset the impact of subsidy removals. That said, we do not expect prices of poultry products to spike significantly when the prices are floated, taking into account eased commodities prices and more stable supply-demand industry dynamics. As such, we believe demand will remain resilient, considering poultry products are the cheapest source of protein.

• 3Q23F to see more explosive growth. Following a sharp QoQ earnings jump (almost 3x) in 2Q23, we anticipate the robust momentum to sustain into 3Q23F. This is taking into account the strong ASP recovery in Indonesia on the back of more balanced supply-demand dynamics. On the other hand, Malaysia operations should also see more solid numbers in view of the stable demand and easing feed costs. We highlight the current prices of corn and soybean meal (Figures 1 and 2) – the key ingredients of poultry feed, have fallen 28% and 17% off 2023’s YTD peak, which should support profit margin of livestock and feedmill businesses across all operating countries. We make no changes to our earnings forecasts pending results release on 28 Nov.

• We raise our DCF-derived TP to MYR0.72, after rolling over our valuation base year and reviewing our risk assumptions. The new TP is inclusive of a 4% ESG discount and implies 11.4x FY24F P/E, which is close to its 5- year mean. We believe the valuation is justified by the exciting earnings momentum supported by improving industry dynamics and growing market share. That said, we opt not to stretch the valuation given the volatile commodity market on the back of geopolotical tensions as well as the soft consumer spending impacted by elevated inflationary pressures.

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

Source: RHB Securities Research - 23 Oct 2023