Leong Hup IPO seen to offer good earnings growth potential

Earnings are expected to register fast growth due to a supply shortage from a ban on antibiotics in Indonesia


Successful applications for shares in Leong Hup International Bhd’s (LHI) initial public offering (IPO) could see upside potential in its share price as the company offers good earnings growth upside.

Inter-Pacific Research Sdn Bhd has forecast the poultry products concern will record year-on-year (YoY) earnings growth of 13.5% and revenue growth of 8.5% in financial year 2019 (FY19) driven by higher production volume from Indonesia, Vietnam and the Philippines markets.

Earnings are expected to register fast growth due to a supply shortage from a ban on antibiotics in Indonesia in the middle of last year, Inter-Pacific noted in a research report on the Main Board bound company.

Inter-Pacific has a target price of RM1.27 for Leong Hup based on price-earnings multiple of 18 times its earnings per share of 7.1 sen for FY20, 17 sen above its listing price of RM1.10 per share. 

Leong Hup wants to spend 75% of its IPO proceeds on capacity expansion of its feed mill and livestock operations which will include the construction of one silo and soybean meal flat warehouse discharging system, the construction of a third pelleting line, and the construction of a grain drying facility in Vietnam.

It also plans to construct its first feed-mill plant in the Philippines and an animal medicine injection line in the medicine plant in the Bau Bang feed mill.

Inter-Pacific stated that the group has good investment merit as its vertical integration and geographical diversification will smoothen its earnings volatility from the cost of raw feed inputs and selling price fluctuations.

“The business features slim profit margins, a short industry cycle and a short product shelf life that draws rapidly adjusting market supply and demand fluctuations,” Inter-Pacific stated in its report.

Its bulk raw material procurement and synergies across the business segment offers cost advantages to the group as opposed to smaller players.

The risk factors to Leong Hup include its foreign-exchange exposure as the cost of its livestock feed is predominantly in US dollars and the majority of the corn and all of its soybean meal requirements are imported from South America.

“Other risks include the volatility of raw material prices, livestock diseases, dependency on biogenetics supply and various operation disruptions,” Inter-Pacific noted.

Leong Hup’s IPO of 937.5 million shares has been oversubscribed by 3.64 times, with a value of RM372.98 million. Leong Hup is slated to list on May 16.

The integrated producer of poultry, eggs and livestock feed currently operates five feed mills in both Malaysia and Indonesia and three feed-mills in Vietnam.