NEAR term earnings prospects of Leong Hup International Bhd is turning positive on the back of recent improvements in livestock prices in Malaysia and Indonesia, in addition to an encouraging performance of its downstream segment (ie The Baker’s Cottage Sdn Bhd).
While it remains to be seen if recent recovery in livestock prices could sustain over the longer term, Hong Leong Investment Bank (HLIB) Research opined that it is unlikely for poultry product prices to revisit their previous lows (ie 2Q 2020).
“This is given (i) economic activities have resumed gradually since then and (ii) high feed cost (mainly corn and soybean meal which prices have risen considerably since 3Q 2020) will likely deter smaller scale farmers from expanding capacity,” suggested analyst Chye Wen Fei in a company update.
Despite having anticipated margin normalisation at Leong Hup’s feedmill segment to continue in the near term, HLIB Research believes that bottom line contribution from the segment will remain stable going forward as lower margin will likely be mitigated by higher sales volume in its Vietnam operations.
Another positive for Leong Hup, according to the research house, is that The Baker’s Cottage (TBC) chain has surpassed its target of 80 outlets by end-2020 to reach 105 outlets and is on track to achieve 150 outlets by end-2021.
HLIB Research expects this strategy to partly mitigate volatile poultry product prices by shifting a portion of Leong Hup’s broiler supply from conventional wholesale market into ready-to-eat poultry products, ie roasted chicken directly to end consumers via TBC outlets,
“We understand that this marketing strategy has also boosted sales of its bakery products which carry more superior margins relative to its ready-to-eat poultry products which in turn helps stabilise earnings at its Malaysian operations over the longer term,” justified the research house.
As a whole, HLIB Research upgraded Leong Hup to “buy” from “hold” with an unchanged target price of 76 sen based on unchanged 18 times FY2021 earnings per share (EPS) of 4.2 sen.
“We upgrade Leong Hup’s rating given the improving near-term earnings prospects and more palatable valuation following recent share price retracement (which has declined by >20% for the past six months),” noted the research house.
“At 68.5 sen (current price), Leong Hup is trading at FY2020-2021 price-to-earnings ratio (P/E) of 25.6 times and 16.1 times respectively.”
At the close of the morning session, Leong Hup was down 0.5 sen or 0.73% to 68 sen with 199,400 shares traded, thus valuing the company at RM2.48 bil. – Feb 8, 2021