PETALING JAYA: Leong Hup International Bhd (LHI)’s downstream venture via The Baker’s Cottage (TBC) is expected to mitigate the price volatility of its poultry business.
According to RHB Research, TBC is expected to account for 30% to 40% of LHI’s broiler supply in Malaysia, once the store count is ramped up to 300 stores in 2023.
Currently, TBC, which has 57 stores, takes up about 7% of LHI’s broiler supply in Malaysia.
“We are positive on the farm-to-plate model which allows TBC to price its roast chicken products competitively and believe TBC will prosper in the targeted suburban areas.
“There is also a potential for synergy as the attractive chicken products can drive footfall to stores and create cross-selling opportunities for its bakery products.
“Earnings contribution from TBC is likely to be immaterial in the near term as the company embarks on an aggressive expansion drive, estimated at 70 outlets per year, ” said RHB Research.
In addition, poultry prices in LHI’s key markets, including Malaysia and Indonesia, have rebounded sharply.
Consumption began to recover from May onwards as both countries eased their respective lockdown initiatives.
“However, industry supply was unable to adjust accordingly, with smaller farmers struggling with finances and facing labour constraints. Moving forward, the tight supply situation in Malaysia may persist due to the Covid-19 crisis, a requirement of heavy capital expenditure to upgrade farms, as well as the lack of succession planning which could phase out the smaller-scale farmers, ” said RHB Research.
The research house noted that smaller scale farmers will face an uphill challenge to upgrade their farm facilities to a closed house format, in order to comply with the conditions set out by the Department of Veterinary Services (DVS) for a renewal of licence.
RHB Research did not make any major changes to its earnings forecast for LHI as the recovery in poultry prices is within earlier expectations and TBC is not expected to chip in meaningfully to earnings.
However, the research house has lowered the risk premium to factor in TBC’s valuation re-rating, resulting in a higher discounted cash flow (DCF)-derived target price of RM1.18, from the previous 88 sen.
The target price implies a financial year 2021 price to earnings multiple of 20.7 times, which is in line with the regional peer average multiple.
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