• Upgrade to BUY from Neutral, new TP of MYR0.82 from MYR0.78, 49% upside with c.4% FY24F yield. We consider Leong Hup International’s 1Q24 results a beat, as we expect it to record stronger quarters ahead. The stock’s current below-mean valuation is attractive, considering the exciting growth potential of key overseas markets on the back of improving market conditions and cost tailwinds. Its share price overhang is diminishing, after the exiting private equity investor ceased to be a substantial shareholder.

• 1Q24 results above expectations. LHIB’s core net profit of MYR57m (>2x YoY) accounts for 21% of our and consensus full-year forecasts. As we anticipate stronger quarters ahead on improving conditions in overseas markets, we raise FY24-26F earnings by 5-14%. Correspondingly, our DCF- derived TP ticks up to MYR0.82 (inclusive of an 8% ESG discount as per our in-house proprietary methodology, as LHIB’s ESG score is four notches below the country median), which implies 11x P/E FY24F or close to the stock’s 5- year mean.

• Results review. YoY, 1Q24 revenue rose 10% to MYR2.4bn, primarily spurred by a sharp recovery in Indonesia (+25%), thanks to higher ASPs and sales volume which, in turn, stemmed from more balanced supply-demand market dynamics. Similarly, its Indonesia unit was the star performer after turning around from a LBITDA in 1Q23. On the flip side, its Malaysia operations saw a 14% decline in EBITDA, as earnings normalised from a high base after the subsidy for broiler chickens came to an end. As a result, 1Q24 EBITDA surged 58% YoY to MYR241m. QoQ, 1Q24 revenue was flattish as all operating markets reported stable numbers. That said, 1Q24 EBITDA fell by 21% QoQ from a high 4Q23 base, which was boosted by a heavy recognition of subsidies kicking in, in Malaysia.

• Outlook. Whilst we expect earnings contributions from LHIB’s Malaysia operations to be adjusted from the high base following the end of the subsidy programme, we gather that the conditions in other overseas markets have continued to improve. The ASP trends in Indonesia and Vietnam are turning more favourable, thanks to the rationalised supply and healthy demand growth. Meanwhile, the Philippines unit is growing strongly, underpinned by capacity expansion to support market penetration. On top of that, the gradual pass-through of lower feed costs to livestock operations should further enhance group profitability ahead.

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

Source: RHB Research - 31 May 2024