Poultry giant Leong Hup an ideal proxy to economic re-opening stock play

LEONG Hup International (LHI) Bhd, one of Southeast Asia’s leading fully integrated poultry operators, can expect better fortunes from 4Q 2021 onwards as gradual economic re-opening across operating countries (particularly, Malaysia and Indonesia which collectively account for more than 50% of LHI’s revenue) augurs well for demand of livestock products.

This will allow Leong Hup to have better flexibility in passing on higher feed costs to customers through higher livestock product prices, according to Hong Leong Investment Bank (HLIB) Research.

“Besides, we believe that improving demand prospects for livestock products will result in better demand and pricing power at (its) feedmill segment as better livestock product prices encourage supply of livestock products,” opined analyst Chye Wen Fei in a company update.

Moreover, HLIB Research is bullish with the rapid expansion of Leong Hup’s business-to-consumer (B2C) channel via the mushrooming of its The Baker’s Cottage (TBC) outlets which will further mitigate the volatile livestock product prices.

TBC will handle channeling a portion of the group’s broiler supply from conventional wholesale market into ready-to-eat poultry products, notably roasted chicken directly to end consumers.

Leong Hup is on track to achieve 160 TBC outlets by end-FY2021 (200-210 outlets by end-FY2022 and 280 outlets by end-FY2023).

“Based on our estimates, TBC will consume at least 30% of LHI’s broiler supply in its Malaysian operations by FY2024,” projected HLIB Research.

“Besides, such move will also boost sales of its bakery products which will carry more superior margins relative to its ready-to-eat poultry products which in turn helps stabilising earnings at Malaysian operations over the longer term

In the immediate term, however, the research house expects Leong Hup’s 3Q FY2021 earnings to come in weaker – both quarter-on-quarter (qoq) and year-on-year (yoy) due to (i) lower livestock product prices and sales volume in 3Q 2021; (ii) significantly higher feed prices; and (iii) margin compression at feedmill segment.

All-in-all HLIB Research maintained its “buy” rating on Leong Hup with a lower target price of 78 sen (from 90 sen previously).

“In our view, as Leong Hup is a good proxy to economic reopening in the Southeast Asian region (given its exposure in Malaysia, Indonesia, Singapore, Vietnam and the Philippines),” justified the research house.

“Over the longer term, we believe further re-rating is warranted should Leong Hup succeed in replicating its B2C channel beyond Malaysia operations.”

At 11.40am, Leong Hup was up 0.5 sen or 0.76% to 66.5 sen with 415,100 shares traded, thus valuing the company at RM2.43 bil. – Oct 14, 2021

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