Leong Hup International Bhd’s (LHI) wholly-owned subsidiary Leong Hup Feedmill Malaysia Sdn Bhd was fined RM157.5mn by the Malaysian Competition Commission (MyCC) for participating in the formation of price-fixing cartel for poultry feed. LHI contends that the fine is “without merit’ and it will take necessary actions to challenge MyCC’s decision via submission of appeal application to Competition Appeal Tribunal (CAT). Maintain Buy with a revised TP of RM0.67/share based on recalibrated 9x CY24 EPS.

Highest Fine Among the 5 Feeds Companies

On 22 December 2023, MyCC levied a penalty of up to RM157.5mn on LHI's subsidiary due to an alleged manipulation of poultry feed prices. This penalty resulted from an investigation initiated by MyCC in August 2022, targeting five companies suspected of manipulating feed prices by sharing sensitive commercial information between early 2020 and mid-2022. The final decision, based on MyCC's findings, was reached in December 2023. Despite a cumulative penalty of RM415.5mn, with LHI's subsidiary bearing 38.0% of the total, LHI refuted the accusations, claiming the lack of merit and it will challenge the authority's decision within the 30-day grace period allotted for submitting an appeal application to the independent CAT.

Our View

As LHI prepares to file its appeal application with CAT to contest the penalty imposed by MyCC, it is anticipated that there will be no significant impact on LHI's financial standing until the appeal result is disclosed, expected by 3QCY24. That said, if the outcome is not favourable to LHI, we believe the company's financial position would be affected. It recorded strong cash flow from operations over the past five years and has consistently maintained an approximate annual cash balance of around RM564.0mn. Assuming LHI fully utilises its cash reserve for the penalty settlement, its pro forma net gearing ratio will deteriorate to 0.96x from 0.7x.

Impact

We maintain our earnings forecast for FY24 pending outcome of the appeal application.

Valuation

We maintain Buy with a revised target price of RM0.67/share (from RM0.82/share) based on recalibrated 9x CY24 EPS.

Source: TA Research - 26 Dec 2023