Lay Hong aims to grow business organically

Higher earnings: (from left) Lay Hong marketing director Yap Chor How, Hoong Chai and executive director (finance) K.T. Ng showing samples of the company

SOMETHING’S brewing at poultry player Lay Hong Bhd. Its share price has shot up by some 66% since March this year.

Notably, a major shareholder of Lay Hong, the giant agri-food player QL Resources Bhd, has been mopping up Lay Hong’s shares since March. QL Resources and its major owners from the Chia family, bought some 1.54 million shares in Lay Hong since February, raising their stake to almost 27% from 24% previously.

Lay Hong has a market capitalisation of RM122mil with 49.5 million shares issued.

QL Resources is only the second largest shareholders in Lay Hong after members of the Yap family who are the founders and controlling shareholders of Lay Hong. They own 44.17% of the company, of which 37.97% is via private-vehicle Innofarm Sdn Bhd, while the Yap family directly own 6.22% in the company.

QL Resources acquired 24% in Lay Hong for RM48.55mil in 2010 from London Biscuits Bhd.

London Biscuits acquired stakes in Lay Hong and another poultry company TPC Plus Bhd, which was to have a continuous supply of liquid eggs to meet its expansion plans.

But London Biscuits later disposed of its stakes in Lay Hong in 2010 and TPC Plus in 2011.

Lay Hong’s share price spiked and shareholding changes have naturally raised speculation that a corporate exercise is brewing.

QL Resources is the largest chicken egg producer in the country (3.2 million eggs per day), a business that Lay Hong is also involved in.

Lay Hong has three main business segments: processed chicken products such as frankfurters, nuggets and fried chicken; broiler birds and eggs. It produces 1.8 million eggs per day and 1.5 millions broiler birds per month. It operates 18 supermarkets under the G*MART brand in Sabah.

In an interview with StarBizWeek, Lay Hong managing director Yap Hoong Chai brushes aside speculation relating to a takeover or merger with QL Resources. Yap says half in jest: “It would have to be an offer that we can’t refuse.”

Interestingly, the 63-year-old Yap, who has been helming Lay Hong for more than 30 years, was a schoolmate of QL Resources managing director Dr Chia Song Kun.

Yap’s father had started Lay Hong in the 1970s and the company was involved in layer farming, which is industry jargon for the rearing of chickens to produce eggs. Lay Hong was listed on Bursa Malaysia in 1994.

The younger Yap later went into a joint venture with Chia of QL Resources to set up a layer farm business in Sabah. Yap, however, declined to elaborate how that joint venture ended.

For now though, Yap is happy to have QL Resources as a major shareholder. QL Resources non-executive director Chia Mak Hooi sits on the board of Lay Hong.

“I am proud of him (Song Kun). QL Resources has grown so big,” he says. Yap says Song Kun had approached him before to buy more of Lay Hong shares.

The recent spike in Lay Hong’s share price has made it the second most expensive listed poultry player in Malaysia, incidentally after QL Resources.

At its current price of RM2.45 per share, Lay Hong trades at a historical price earnings (PE) multiple of close to 18 times, while QL Resources’ PE multiple is 26.58 times 2014 earnings.

In comparison, Farm’s Best Bhd is trading at 8.67 times earnings, Huat Lai Resources Bhd (6.16 times), Teo Seng Capital Bhd (10.82 times), CAB Cakaran Corp Bhd (4.44 times) and LTKM Bhd (5.37 times).

Yap is looking to enhance the profitability of Lay Hong by investing in the downstream activities. Over the last three years, Lay Hong has pumped in RM80mil mainly to build a new manufacturing facility for its chicken-based processed food products, located adjacent to its existing plant in Tanjong Karang, Selangor, as well as to increase farms production capacities.

Yap says the construction of the plant is now complete, and he expects to double the current capacity to 1,400 tonnes per month from 500 tonnes currently and cater the company growth for the next four years.

He adds that the capital expenditure was funded through internal funds and bank borrowings. Lay Hong gearing level currently is at 1.3 times.

The processed food division contributed half to the company’s revenue in financial year ended March 31, 2014 (FY14) while its chicken eggs and broilers made up 25% and its Sabah supermarket business 20%. Five per cent of revenue came from the sale of fertiliser and animal feed.

“The demand for processed food products is more stable and expanding. The competition in this segment is not that stiff,” Yap says.

Lay Hong slipped into the red in FY13, as a result of a spike in raw material prices as well as excess supply of fresh eggs in the country.

It subsequently made a profit of RM7.16mil in FY14.

Yap explains that the earnings improved due to a moderation in raw material prices such as corn and soybean, which are Lay Hong’s main feedstock, accounting for some 70% of its operational cost.

He also explained that Lay Hong has been exporting more eggs in order to offset the excess supply situation in Malaysia.

Exports to Singapore and Hong Kong have increased, albeit marginally.

Yap says the plan is to grow Lay Hong organically, in the processed food, layering and broiler segments.

“We are going slow on our supermarket network expansion. We plan to open only three G*MART units in two years,” he says, adding that the retail business had also contributed to Lay Hong’s profit margin compressions.

Yap expects corn and soy bean prices to stabilise this year and for the price of fresh eggs to go up.

“Given this improved market condition, our production costs should normalise in the current financial year.

“The completion of our new production facility and specific measures to control costs and improved efficiencies should help improve the group’s performance going forward,” he says.