By SHAHEERA AZNAM SHAH
THE recent improvement in livestock prices is expected to uplift Leong Hup International Bhd’s near-term earnings prospects, Hong Leong Investment Bank Bhd (HLIB) stated in a fresh report.
The investment bank upgraded its valuation for Leong Hup to ‘Buy’ from ‘Hold’ due to the improving near-term earnings prospects and the more palatable valuation following recent share price retracement.
It maintained its core earnings forecast for the poultry concern’s financial year 2020 to 2022 (FY20-FY22) and target price of 76 sen, based on 18x FY21 earnings per share (EPS) of 4.2 sen.
“We are turning more positive on Leong Hup’s near-term earnings prospects on the back of the recent improvement in livestock prices in Malaysia and Indonesia, of which will mitigate the feed costs, as well as the encouraging performance and improvement at its downstream segment.
“We understand that livestock prices in Malaysia and Indonesia, which are the key markets for Leong Hup’s livestock segment, particularly the day-old-chick and broiler, have been improving since December last year,” it said.
The rising livestock prices are currently contributed by the Indonesian government’s ongoing efforts to control day-old-chick supply by limiting egg hatching and bringing in early culling of parent stocks.
The supply chain adjustment among contract farmers as a result of rising feed costs and depressed poultry product prices in 2020 in addition to the seasonality are among the factors affecting livestock prices, said HLIB.
“While it remains to be seen if the recent recovery in livestock prices could sustain over the longer term, we believe it is unlikely for poultry product prices to revisit their previous lows in the second quarter last year (2Q20).
“Economic activities have resumed gradually since then and the high feed cost, in which prices have risen considerably since 3Q20, will likely deter smaller-scale farmers from expanding their capacity,” it said.
The bank is positive on Leong Hup’s strategic business plan of widening its downstream segment through The Baker’s Cottage Sdn Bhd (TBC) brand and achieving the group’s target of opening 150 out- lets by end-2021.
Having surpassed its target of 80 TBC outlets by end-2020, the bank understands that Leong Hup has achieved 105 TBC outlets thus far, and is on track to achieving 150 outlets by end-2021.
“Apart from allowing Leong Hup to partly mitigate the volatile poultry product prices, we understand their marketing strategy has boosted the sales of its bakery products which carry more superior margins relative to its ready-to-eat poultry products.
“The bakery products help stabilise Leong Hup’s earnings for its Malaysian operations over the longer term,” it said.
For Leong Hup’s feedmill segment, HLIB expects the company will remain as a stable business despite the anticipated continuation of margin normalisation in the near term due to capacity expansion of its Vietnam- and the Philippines-based operations.
Leong Hup’s share price closed half-a-sen lower at 68 sen yesterday, giving it a market capitalisation of RM2.48 billion.