Date of Report and Broker Name
- Date of Report: October 7, 2024
- Broker: Maybank Investment Bank Berhad
Company Overview
Leong Hup International (LHIB MK) is one of the largest integrated poultry producers in the ASEAN region, with operations in Malaysia, Singapore, Indonesia, Vietnam, and the Philippines. The company has significant exposure to poultry and animal feed, with a major focus on key markets like Malaysia, Vietnam, and Indonesia.
Positive 2H24 Outlook
Leong Hup International’s 2H24 outlook remains optimistic, supported by stable poultry demand across its key countries of operation. This positive performance is further reinforced by favorable foreign exchange (FX) tailwinds. A sharp recovery in the Malaysian Ringgit (MYR) during 3Q24, particularly the 14.4% appreciation against the USD, is expected to result in significant cost savings, particularly in corn and soybean feed, which are key inputs in poultry production.
Earnings and Valuation Adjustments
In light of these positive developments, Maybank Investment Bank has adjusted Leong Hup’s FY24E-FY26E earnings estimates, increasing them by 2%-7%. This adjustment stems from lower Indonesia poultry average selling prices (ASPs) and updated USD/MYR assumptions. The bank raised the target price (TP) for Leong Hup to MYR0.85, up from MYR0.82, while maintaining a “BUY” rating. The stock remains undervalued, trading at just 8x forward price-to-earnings (PER) with a dividend yield of over 3%.
Regional Demand and Supply Dynamics
The demand and supply of poultry in Malaysia and Vietnam have balanced out, stabilizing ASPs for both broilers and day-old chicks (DOCs) in these markets. However, the prolonged effects of Indonesia’s government directive on industry-wide culling have kept broiler and DOC ASPs in Indonesia relatively weak. Sales from Malaysia, Indonesia, and Vietnam collectively account for around 84% of the group’s total sales as of 2Q24.
Foreign Exchange Impact
The recovery of the MYR in 3Q24 presents a significant upside for Leong Hup International. The company typically holds a three-month inventory of feed raw materials, which means the benefits of FX cost savings may be reflected from 3Q24 onwards. Based on Maybank’s analysis, a 10-sen appreciation in the MYR against the USD could boost the company’s earnings by approximately 12% annually. The revised USDMYR assumption is now 4.40 for FY24-FY25E, down from 4.50 previously.
Financial Performance
Leong Hup International reported steady revenue and profitability figures for FY22 and FY23, with revenues of MYR9.04 billion in FY22 and MYR9.54 billion in FY23. Core net profit for FY24E is forecast at MYR321 million, a 6.3% year-over-year increase. EBITDA margins are expected to remain strong at around 11% for FY24E and FY25E. Despite slightly weaker ASPs in Indonesia, overall group sales volume is expected to remain steady, contributing to the company’s improved earnings projections.
Risk Factors
Leong Hup faces several risks, including market volatility in feed and poultry prices, as well as potential demand-supply imbalances. Poultry production is also highly vulnerable to disease outbreaks, which could significantly impact operations and profitability. The company is also appealing a MYR157.5 million fine from Malaysia’s Competition Appeal Tribunal for alleged price manipulation of feed between 2020 and 2022.
ESG (Environmental, Social, and Governance) Considerations
Leong Hup is focused on waste management, biosecurity, and food safety, which are key concerns in the poultry industry. The company engages licensed contractors to handle hazardous waste and converts poultry manure into fertilizer, which is either sold or donated to the community. Leong Hup has installed on-site water treatment plants and ensures the health and safety of its products by adhering to international food safety standards.
The company has been transparent in its ESG efforts, though it lacks formal long-term emission reduction targets. Its ESG score is below average, with a score of 18, largely due to limited disclosures on key ESG metrics.
Conclusion
Leong Hup International is well-positioned for growth in 2H24, with stable demand and potential FX-driven cost savings boosting profitability. The stock remains undervalued with a promising outlook, though risks related to market volatility and disease outbreaks should be considered.
