We remain optimistic about Leong Hup International Berhad (LHI)’s FY24 outlook, thanks to improved margins from its operations in Vietnam and the Philippines, driven by higher demand and ASP, coupled with favourable input costs.

Key takeaways from the analyst briefing yesterday include:
i) 9MFY24 Results Review
ii) FY25 Outlook Remains Resilient
iii) Higher Capex of RM350mn for FY25

We have raised our FY24-26 core earnings estimates by 13.0%-31.4% and upgrade our TP to RM0.79/share. Reiterate Buy.

9MFY24 Results Review

For 9MFY24, core earnings surged 26.8% YoY to RM279.0mn, despite a slight decline in revenue to RM7.0bn (-1.9% YoY). The better earnings were mainly due to: i) a lower effective tax rate of 16.9% (-6.3%-pts YoY) and ii) reduced operating expenses of RM6.5bn (-4.8% YoY), which more than offset the revenue contraction. The lower effective tax rate for 9MFY24 was attributed to: i) lower tax expenses in Malaysia and ii) a reduced tax rate of 15% for its F&B operations in Vietnam, due to tax incentives Raw materials, which account for c.80% of LHI's total cost of sales, also contributed to the earnings improvement in 9MFY24. Soybe

an meal prices continue to trend downward, hovering at approximately USD291.6/tonne as of 13 November 2024, which is below the pre-pandemic level. Although corn prices rose to USD426.5/100 bushels on 13 November 2024, up from USD397.25/100 bushels in June 2024, they remain favourable, with YTD prices down by 11.2%. All in all, we project an EBITDA margin of 11.9% for FY24 (+1.1%-pts YoY).

FY25 Outlook Remains Resilient

To recap, Vietnam has emerged as the second-largest earnings contributor with an EBITDA of RM63.8mn in 3QFY24 (20.6% of the group’s EBITDA), representing a robust 23.6% YoY growth. The growth was driven by higher demand and ASP, along with lower feed costs. On a QoQ basis, the ASP of DOCs in 3QFY24 increased to RM2.35/chick (from RM2.00/chick), broiler chicken prices rose to RM6.1/kg (from RM5.4/kg) and egg ASPs, improved slightly to RM0.35/egg (from RM0.34/egg). Going forward, we expect Vietnam’s growth trajectory to continue, supported by higher ASPs and favourable raw material costs.

Moving into FY25, management remains positive about the group’s outlook, driven by higher ASPs and growing demand in Vietnam and the Philippines, coupled with stable feed costs, which are expected to offset the normalised performance in Malaysia and Indonesia. As a result, we project revenue to grow by 2.0% YoY to RM9.4bn for FY25

Higher Capex of RM350mn for FY25

Management has maintained its FY24 Capex forecast of RM300mn. The group reported an investment of RM1.8mn in a wastewater treatment plant in Indonesia, which is currently undergoing government assessment before operations begin. Additionally, the group has launched 3 new Sunny’chick outlets in Indonesia, bringing the total to 24 outlets. In Malaysia, the group has invested RM18.0mn in a slaughtering plant in Yong Peng and RM9.23mn in a new egg grading machine for Teo Seng’s operations. The slaughtering plant is 75% complete and is expected to be fully operational by 3QFY25, while the egg grading machine began operations in October 2024.

Looking ahead, the group plans to increase its Capex to RM350mn for FY25. Of this, RM200mn will be allocated to domestic operations, primarily to expand the Baker’s Cottage chain with 25 new outlets (targeting a total of 180 outlets by 2025) and to support Teo Seng’s operations. The remaining RM150mn will be directed towards optimizing efficiency in its overseas operations and strengthening its downstream business in Vietnam, Indonesia, and the Philippines.

Impact

We tweaked our FY24-26 core earnings upwards by 31.4%/17.4%/13.0% after lowering our costs assumption by 6.7%/6.7%/4.7%. Additionally, we trimmed our average effective tax rate by 3.3 pts to 21.7%.

Valuation

Following the earnings revision, we raised LHI’s target price to RM0.79/share based on 8x CY25 EPS. Reiterate Buy.

Source: TA Research - 28 Nov 2024