‘Buy’ call on LHI retained despite profit warning

brokerage firms maintained their positive stance on LHI on the back of long-term earnings prospects from capacity expansion and robust poultry consumption as it is the cheapest source of protein. (File pic shows Leong Hup International Bhd's corporate office

KUALA LUMPUR: Brokerage firms have maintained their “‘buy” call on Leong Hup International Bhd (LHI) despite its shares falling in active trading after it issued a profit warning.

LHI shares fell 5.88% to 80 sen at 5pm yesterday from 85sen on Aug 9 after the group’s profit warning announcement on its expectation of lower net profit for the second quarter ended June 30, 2019 (2Q19) compared with a year ago due to a decline in the average selling prices (ASP) in most of the products sold by the group particularly in Malaysia.

The profit warning announcement came just three months after LHI was relisted on Bursa Malaysia Main Market.

However, brokerage firms maintained their positive stance on LHI on the back of long-term earnings prospects from capacity expansion and robust poultry consumption as it is the cheapest source of protein.

Ambank Research noted that it is keeping its “buy” recommendation on the stable demand of chicken, adding that the group’s sources of income from Singapore, Vietnam, Indonesia and the Philippines would provide growing potentials.

It believes that the decline in ASP of products is a “temporary problem” as volatility in selling prices are beyond the control of the management.

“We shall remain cautious on price movements of broiler day-old-chicks and broiler chicken, ” Ambank Research said.

In a press release by LHI on Aug 9, the group said the ASP of the broiler chicken in Malaysia declined by 14.7% to RM3.99 per kg compared with RM4.68 in 2Q18.

It added that the selling price of broiler chicken in Malaysia also dropped to as low as RM2.60 per kg in 2Q19.

“In comparison, the lowest selling price of broiler chicken in 2Q18 was RM3.90 per kg, ” LHI noted.

Given LHI’s announcement on the drop in ASP, AmBank Research trimmed LHI’s earnings forecast by 11.1%, 9.1% and 8.7% to RM214.0mil, RM236.8mil and RM256.7mil respectively.

Following the earnings revision, the research house reduced the fair value to RM1.17 per share from RM1.46 per share based on a price-to-earnings ratio of 18 times over financial year ending Dec 31, 2020 (FY20) earnings.

“Despite our lower fair value, the stock still offers a potential upside of 38% and dividend yield of 2.0%. Hence, we maintain our Buy recommendation on LHI, ” AmBank Research said.

Moving forward, RHB Research, which also kept its ‘buy” call on LHI, pointed out that ASP prices have rebounded in the third quarter this year following the weak ASP of products in 2Q19.

“A sharp 3Q19 earnings rebound would be a near-term catalyst. Sales volumes across its operating markets have continued to grow and product prices have rebounded strongly since the beginning of 3Q19.

“Based on the product prices provided by the Department of Veterinary Services (DVS), broiler DOC and broiler prices have surged 30% in the 3Q19 (updated to end-July) from their 2Q19 average as demand-supply turns favourable, and hence we reckon that a structural oversupply situation is unlikely, ” it added.

However, RHB Research noted the risks to its recommendation included unfavourable changes in regulatory policy and supply-demand dynamics.

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