Leong Hup’s downstream move deemed positive

  • Corporate News
  • Wednesday, 03 Jun 2020

Positive synergies: A Baker’s Cottage outlet in Petaling Jaya. On Monday, Leong Hup International entered into three related party transactions to acquire The Baker’s Cottage for RM20mil cash.

PETALING JAYA: While poultry producer Leong Hup International Bhd’s (LHI) acquisition of The Baker’s Cottage Sdn Bhd (TBC) has neutral earnings impact, there are positive synergies to be derived from the acquisition.

According to Maybank Investment Bank (IB) Research, the acquisition of the food manufacturer and distributor will enable LHI to move downstream.

This will open up a new revenue stream for LHI’s poultry products, in line with the group’s intention to expand TBC’s store network going forward.

The research house noted that the acquisition equates to a one-year trailing price-earnings (PE) ratio of 33 times, which is above LHI’s PE ratio of 17 times for financial year 2021 (FY21).

“Based on our estimates, assuming an interest cost of 4% and TBC’s FY19 profit after tax of RM600,000, this acquisition is earnings neutral to LHI.

“LHI’s net gearing will rise marginally to 0.89 times, from 0.88 times, assuming that the acquisition is fully funded by debt, ” said Maybank IB Research.

On Monday, LHI had entered into three related party transactions to acquire TBC for RM20mil cash.

The transactions comprised a share acquisition agreement with Emerging Glory Sdn Bhd for the entire issued and paid-up share capital of TBC for RM18mil cash, as well as two business acquisition agreements with Astaka Shopping Centre (Muar) Sdn Bhd and Poly-Yarn Industries Sdn Bhd for TBC’s retail bakery business for RM1.5mil and RM900,000 cash, respectively.

Astaka owns and operates six outlets in Negri Sembilan, Melaka and Johor, while Poly-Yarn Industries owns and operates three outlets in Selangor.

LHI plans to fund the acquisition with a combination of borrowings and internally generated funds.

The acquisition is targeted to be completed by the third quarter of 2020.

In a Bursa Malaysia filing, LHI said the proposed acquisition will allow the group to own The Baker’s Cottage brand and integrate vertically downward to capture incremental value added from its poultry related product sales and provide margin stability in times of live broilers supply-demand imbalance.

Maybank IB Research noted that the quick-service restaurant business will open up a new demand for LHI’s poultry supply, increase its customer base and benefit from economies of scale.

“We understand that LHI aims to expand its TBC store network but has not committed to a store opening target yet, ” the research house said.

LHI ended the day 2.94% or two sen lower at 66 sen, traded on a volume of 2.19 million shares.

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