AmInvest Research retains Buy on Leong Hup, FV 88 sen

  • Analyst Reports
  • Tuesday, 30 Jun 2020

AmInvest Research said Leong Hup International plans for its B2C business to ride on the volume game, mainly competing on affordability of its food products (like chicken rice and roast chicken).

KUALA LUMPUR: AmInvestment Research is retaining its Buy call on Leong Hup International (LHI) with a higher fair value of 88 sen a share after it recently acquired 100% of The Bakers Cottage Sdn Bhd (TBC).

It said on Tuesday its FV is based on a higher PE multiple of 17 times from 14 times as it believes the worst is over for poultry prices.

“We believe demand should start to recover 2HFY20 after the ease of MCO as fast-food restaurants reopen.

“We maintain our earnings forecasts as we think that the impact of the acquisition will be immaterial to the group’s performance at the start, ” it said.

To recap, LHI recently purchased 100% of TBC for RM17.9mil. The group is also acquiring TBC Retail Business, with six retail outlets in Melaka, Negeri Sembilan and Johor, from Astaka Shopping Centre (Muar) Sdn Bhd for RM1.5mil.

The group is also acquiring TBC Retail Business with three retail outlets in Selangor, from Poly-yarn Industries Sdn Bhd for RM900,000.

“We think that the valuation is slightly expensive as the purchase price implies a historical PE of 30x, which is much higher than our valuation of Leong Hup at 17 times FY21F PE.

“The impact to gearing will be minimal. The RM20.3mil purchase will be funded by internally generated funds and borrowings. It would increase net gearing to 1.03 times from 1.02 times.

“We are of the view that the acquisition is a long-term positive for the group. However, we think that the impact to earnings will not be material at the start, ” it said.

AmInvest Research noted TBC made a net profit of RM593,000 in FY19, which is 0.4% of LHI’s total net profit in FY19. However, the acquisition provides the group with vertical integration in its businesses.

“We think that this gives the group more control in the movement of its poultry products throughout the whole supply chain as it introduces to the group a B2C business, ” it said.

During the movement control order (MCO), the sales of TBC’s chicken food products grew exponentially with its successful promotional campaign.

As poultry prices were low during the period, TBC was able to offer its products at a low price (whole roast chicken for RM9.90).

TBC saw its sales peak at 14,500 birds per day (average daily sales was 4,500 birds pre-MCO).

AmInvest Research said LHI plans for its B2C business to ride on the volume game, mainly competing on affordability of its food products (like chicken rice and roast chicken).

As such, the group plans on opening around six outlets per month with a goal of 300 outlets by 2023 (50 outlets currently).

The group targets to achieve RM500mil of revenue with 300 outlets in 2023. Capital expenditure is estimated to be roughly RM500K per store or roughly RM36mil per annum.

“We believe that the long-term outlook for LHI is positive due to the relatively stable demand of chicken and strong long-term earnings growth underpinned by expansions of the feedmill and livestock businesses in Malaysia, Vietnam and the Philippines, ” it said.

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