Key takeaways from the virtual analyst briefing:

i) 3QFY23 showed growth, but rising costs may impact 4QFY23's margins;

ii) Revenue in Vietnam declined due to weakened export volumes;

iii) Broiler chicken ASP stabilizes post-subsidy, aiding producers' compensation.

We reiterate Buy and a lower target price at RM0.82/share based on 11x CY24 EPS.

3QFY23 Showed Growth, But Rising Costs May Impact 4QFY23's Margins

In 3QFY23, the feedmill segment saw growth with a 3.8% rise in sales volume, coupled with reduced soybean meal and corn prices, expanding the EBITDA margin to 11.8%. However, soaring soybean meal costs in November suggest a probable contraction in the segmental EBITDA margin for 4QFY23. The impressive 3QFY23 earnings were due to increased ASP across the boards and provision of government grants in Indonesia. Looking ahead, the expected net margin normalization in the upcoming quarter's results is projected at around 3.3%.

Revenue in Vietnam Declined Due to Weakened Exports Volume

Vietnam's revenue decline stems from reduced export volume, influenced by escalating inflation and recession pressure that subdued consumer sentiment in Europe and US. We believe that the situation worsened with an oversupply of chicken due to illegal poultry smuggling, leading to decreased ASP domestically. Nevertheless, LHI is actively addressing these challenges by implementing costeffective strategies and optimizing capital expenditure and resource allocation to mitigate risks.

Broiler chicken ASP stabilizes post-subsidy, aiding producers' compensation

Following the removal of price controls and subsidy cessation in Malaysia, the wholesale ASP of broiler chicken remains stable at around c.RM6.00/kg. This stability corresponds to significant decreases in feed costs, consistently pushing the ASP below the previous ceiling price for several months. Consequently, the poultry item's ASP increase remains moderate, enabling producers to compensate for the absence of subsidies. However, the company forecasts lower sales volume for FY24, potentially due to the high base effect in FY23. We deduce that this decrease might also be attributed to poultry operators are less incentivised to increase production yield amid the current low exfarmgate prices.

Impact

We trim our FY23-25F earnings projections by 11.1%/21.1%/18.6%, respectively, as a reflective of normalising profit margin from the windfall gain in 3QFY23.

Valuation

We reiterate Buy with a lower target price at RM0.82/share (from RM1.03/share) based on 11x CY24 EPS.

Source: TA Research - 30 Nov 2023