AmInvest Research retains buy on Leong Hup, higher fair value

AmInvest Research: “We believe that LHI will show a stronger, more consistent set of results in the coming quarters, despite MCO 3.0."

KUALA LUMPUR: AmInvestment Research is maintaining its buy call on Leong Hup International (LHI) with a higher fair value (FV) of RM1.02 a share versus 86 sen a share previously as it is more upbeat about the earnings outlook.

In its research note on Monday, it the poultry company’s valuation is based on an unchanged price-to-earnings ratio (PER) of 17 times FY22F EPS.

“We increase our FY21/FY22/FY23 net profit forecasts by 14%/20%/18% respectively as we have become more optimistic on LHI’s near-term and future prospects, ” it said.

LHI has posted underwhelming earnings since its listing in May 2019.

AmInvest Research believes this is largely due to a downswing in local broiler and day-old-chick (DOC) average selling prices (ASP) at time of listing, before being further hit by the effects of the pandemic.

“We believe that LHI will show a stronger, more consistent set of results in the coming quarters, despite MCO 3.0, ” it said.

It said there were five factors for its upbeat outlook.

1) Local broiler and DOC supply imbalances have largely been corrected.

2) Local table egg price recovery forecasted in 2HFY21.

3) Broiler prices in Indonesia recovered as a result of culling exercises and recovering spending power.

4) The Baker’s Cottage (TBC) contributions and consumer’s rising preference for takeaway and delivery to dampen effects of MCO 3.0.

5) The feed mill in Luzon, the Philippines is expected to improve livestock segment margins.

AmInvest Research said nevertheless, it also noted the following sources of downward pressure:

1. The feed mill segment will no longer ride on elevated margins as result of rising raw material prices. The success of LHI’s Philippines and Vietnam segments in 2HFY20 was a result of supernormal margins from feed mill sales.

2. Covid-19 case resurgence in any of LHI’s geographical segments, most notably in the Philippines, Indonesia and Vietnam.

3. Further expansion plan delays.

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