AS Malaysia is embroiled with chicken shortage which has led to spiralling prices, integrated poultry farmer Leong Hup International Bhd is seeing stars from domestic poultry price controls (until June 1) that have hindered the industry’s ability to raise poultry average selling prices (ASPs) amid material spikes in feed raw material costs.
Set against the latest government ruling to bar poultry exports from June 1, Maybank IB Research has raised concerns that such move could adversely impact Leong Hup’s poultry supply to Singapore.
With bleak prospects beckon as evident from its dismal 1Q ended March 31, 2022, the research house has downgraded Leong Hup to “hold” (from “buy” previously) on the basis of prolonged regulatory restrictions with a lower target price of 50 sen (from 76 sen previously).
“The recent Government announcement on the poultry export ban from Jun 1 onwards could also further exacerbate Leong Hup’s weak earnings as it may have to halt its poultry supply into Singapore,” justified analyst Jade Tam in a results review.
“Note that Singapore operations accounted for 10% and 4% of Leong Hup’s group revenue and EBITDA (earnings before interest, taxes, depreciation, and amortisation) respectively as of end-1Q FY2022.”
According to Maybank IB Research, Leong Hup’s 1Q FY2022 core net profit of RM20 mil (-71% year-in-year {yoy], -46% quarter-on-quarter [qoq]) came in below expectations at 11%/12% of its/consensus full-year earnings estimates.
The earnings disappointment was largely due to compressed margins at its livestock and feedmill segments. However, the group’s 1Q FY2022 revenue of RM2.1 bil (+25% yoy) was in-line at 28% of the research house’s FY2022 revenue estimate.
Meanwhile, Hong Leong Investment Bank (HLIB) Research expects near-term headwinds to remain for Leong Hup on the back of the recent Government’s move to ban the exports of chicken in an attempt to manage food inflation and ensure food security in the country.
“Prices of key inputs (particularly, soybean meal and corn) will likely remain escalated (arising from high fertiliser prices and tight supply of corn and soybean),” projected analyst Chye Wen Fei.
Like Maybank IB Research, HLIB Research also downgraded Leong Hup to “hold (from “buy” previously) with a lower target price of 56 sen (from 66 sen previously).
“Despite the weak 1Q FY2022 showing, we believe Leong Hup’s performance will improve from 3Q FY2022 as prices of key inputs (in particular, soybean meal and corn) have (gradually) weakened since 1Q 2022, hence will result in lower feed costs,” projected the research house.
“Besides, we believe demand for poultry products will remain robust as economic activities in all of Leong Hup’s operating countries have resumed with minimal restrictions.”
At 9.25am, Leong Hup was up 0.5 sen or 0.99% at 51 sen with 105,600 shares traded, thus valuing the company at RM1.86 bil. – May 25, 2022
