WITH favourable farm dynamic on his side, integrated poultry, eggs and livestock feed producer Leong Hup International Bhd is poised to scale greater heights in the near future.
For one, RHB Research is bullish about prospects of accelerated market consolidation with more smallholders being phased out permanently by the COVID-19 pandemic, thus paving the way for larger industry players like Leong Hup to capitalise and gain market share.
“We believe the supply adjustment may have underpinned the ASP (average selling price) upcycles seen in major operating markets,” observed analyst Soong Wei Siang in a results review.
“This is as the smaller farmers struggled to raise supply after being financially hit by the pandemic; they are now facing the issue of higher feed costs.”
For its 1Q FY2021, Leong Hup posted a 223% year-on-year (yoy) jump net profit to RM70.33 mil (1Q FY2020: RM21.79 mil) on the back of an improved revenue of RM1.68 bil (1Q FY2020: RM1.43 bil).
Additionally, RHB Research is also positive with Leong Hup’s downstream venture via The Baker’s Cottage (TBC) which contributed 8% of both Malaysia revenue and earnings before interest, taxes, depreciation, and amortisation (EBITDA) in 1Q FY2021.
“TBC is projected to take up 30-40% of LHIB’s broiler supply once the store count is ramped up to 300 stores in 2023 from 129 stores currently,” noted the research house.
All-in-all, RHB Research has upgraded Leong Hup to “buy” (from “neutral” previously) with a target price of 87 sen (from 76 sen previously) given its 1Q FY2021 results were above expectations thanks to recoveries in product volumes and ASPs across key markets.
“Essentially, we believe the ASP upcycle can sustain – at least – in the near term following supply adjustments with smaller farmers struggling to raise supply,” projected the research house.
“Current valuation is attractive as Leong Hup International is trading at below mean – this is despite the favourable industry dynamics and sharp earnings recovery in FY2021 (+77% yoy).
Meanwhile, AmBank Research is also optimistic that Leong Hup will maintain its streak of strong earnings. This is based on strong and stable broiler and day-old chick prices, a local table egg price recovery in 2H FY2021 and solid contributions from TBC.
“We believe that Leong Hup will have a solid 2Q FY2021 despite the current movement control order (MCO 3.0) given the seasonal effects of cold weather and festive seasons driving up poultry ASP,” contended the research house.
“Additionally, we reckon that the rising popularity of delivery and take-away will continue to hold HoReCa (hotel, restaurant and café) demand, preventing it from falling to levels of previous lockdown periods.”
At 10.12am, Leong Hup was down 0.5 sen or 0.70% to 71 sen with 4.54 million shares traded, thus valuing the company at RM2.59 bil. – May 21, 2021
