PETALING JAYA: The average selling prices (ASP) of poultry would face some volatility with the ongoing conditional movement control order (CMCO). Prices of raw material have also been steadily rising and this could limit the earnings of Leong Hup International Bhd (LHI).
Despite that, a better second half of FY2020 is seen for the poultry group as on the whole, poultry products’ ASP have gone up since the reopening of the economy after the first MCO.
In a report, AmInvestment Bank said poultry prices have experienced a gradual recovery after the first MCO and for FY20 it has adjusted its forecasts for local products upwards.
For broiler chicken, it expects a 27% rise in ASP to RM3.90 per kg, while for day-old-chicks (DOC) an ASP increase of 15% to RM1.36.
“We believe that our average price assumption of RM3.90/kg for broiler chicken for FY20 is conservative enough to account for any price decline following the second MCO in October 2020, ” the research firm said.
However, it said LHI expects poultry product prices to be volatile as the CMCO would weaken demand from the hotel, restaurant and catering (Horeca) sector.
“The lower demand for poultry is expected to affect animal feed sales volume. Furthermore, raw material prices have been steadily rising, ” the research firm said, following a conference call with the company.
It noted that currently, Malaysian broiler and DOC ASP are at RM4.30 and RM1.50 respectively (FY19 average: RM4.17, RM1.50), with Indonesia at similar figures.
Due to poorer demand, LHI’s expansion plans have also been recalibrated, whereby overall capex is lower and it could be looking towards processed food production.
On a brighter note, it said sales at The Baker’s Cottage (TBC), which it acquired in June, have normalised. LHI’s store expansion is ahead of schedule, it noted.
With TBC’s good showing and the rise in poultry price after the first MCO, the research firm expects LHI’s earnings to come in higher by about 3% for FY20.
For FY21, however, it sees a 2% rise in earnings because it believes the pattern of poor demand will persist into next year.
The report notes that LHI expects lower sales from its feed mills as result of lower meat demand.
Raw material prices have risen steadily since 1H20 – corn and soybean are up 15% and 16%, respectively quarter-on-quarter (q-o-q), in turn leading to a forecast 15% q-o-q increase of feed prices.
“Fortunately, gross margin contraction arising from lower feed meal pricing is only temporary and not expected to affect profit margins significantly as the extra cost will eventually be passed on to customers.
“Overall capex for FY20 is expected to fall to RM300mil from the previous estimation of RM500mil, ” it added.
In Malaysia, the capex would mainly go for its processed food plant and TBC expansion.
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