Lay Hong’s 1QFY19 core net profit of RM2.2 (QoQ: -77.2%; YoY: -45.7%) disappointed, accounting for only 4.3% of our full-year forecasts. Key variances against our forecast include (i) lower-than-expected table egg prices, and (ii) higher than-expected feed costs (in particularly, soybean meal and coal meal). We cut our FY19-21 core net profit forecasts by 25.4-34.1%, to account for higher feed cost and lower table egg selling price assumptions. We cut our SOP-derived TP on Lay Hong by 55.6% to RM0.55 to reflect (i) the downward revision in our core net profit forecasts (ii) lower P/E (as the company no longer deserves high valuation given its weaker earnings prospects), and (iii) valuation parameter update (post release of annual report). Downgrade to HOLD.

A disappointing quarter. 1QFY19 core net profit of RM2.2m (QoQ: -77.2%; YoY: - 45.7%) disappointed, accounting for only 4.3% of our full-year forecasts. Lower-than expected table egg prices and higher-than-expected feed cost (particularly soybean meal and corn meal prices) were the main culprits to the weaker-than-expected performance.

QoQ. 1QFY19 core net profit declined by 77.2% to RM2.2m, mainly on the back of lower egg prices, lower processed product and egg sales volume, as well as higher feed costs (which have collectively resulted in PBT at the integrated livestock farming segment declining by 91.7% to RM1.4m).

YoY. Although revenue was higher by 8.9% (at RM199.3, mainly on the back of higher table eggs output, higher sales volumes and selling prices for processed frozen products and pasteurised eggs), 1QFY19 core net profit declined by 45.7% to RM2.2m, dragged mainly by higher feed costs (arising from higher soybean meal and corn meal prices) and lower selling prices of table eggs.

Forecast. We cut our FY19-21 core net profit forecasts by 34.1%, 26.7% and 25.4% respectively, largely to account for higher feed cost and lower table egg selling price assumptions.

Downgrade to HOLD, TP: RM0.55. We cut our SOP-derived TP on Lay Hong by 55.6% to RM0.55 to reflect (i) the downward revision in our core net profit forecasts (ii) lower P/E (from 20x previously to 12x, as we believe the company no longer deserves higher valuation given its weaker earnings prospects), and (iii) valuation parameter update (in particular, issued shares, following the recent release of FY18 annual report).

While we expect subsequent quarters to come in stronger (relative to 1QFY19) and its on-going expansion plans (for its broiler, pasteurised eggs, and processed frozen product capacities) to translate to better performance from FY20 onwards, we believe it would take a while before earnings recover to previous level, (given the high feed costs). We downgrade our rating on stock from Buy to HOLD.

Source: Hong Leong Investment Bank Research - 28 Aug 2018