PETALING JAYA: Leong Hup International Bhd (LHI) is expected to show a stronger, more consistent set of results in the coming quarters, despite the movement control order (MCO) 3.0.
The poultry player has posted underwhelming earnings since its listing in May 2019.
This was largely due to a downswing in local broiler (chickens raised for meat) and day-old-chick (DOC) average selling prices (ASP) at the time of listing, before being further hit by the effects of the Covid-19 pandemic, said AmInvestment Research.
However, the research unit has increased its financial year 2021 (FY21), FY22 and FY23 net profit forecasts for LHI by 14%, 20% and 18% respectively
AmInvestment Research explained that this was because local broiler and DOC supply imbalances have largely been corrected.
“Farms have adjusted their supply for the MCO-induced weakened demand. Broiler supply can be adjusted quickly given its production cycle of 35 to 37 days. Also, during this time, demand and high feed costs impacted small-scale farms most significantly, leading to mass closures across Malaysia.
“Larger-cap companies, however, are able to maintain their operations, ” said the research unit.
As a result, broiler ASP is seeing an even stronger recovery in FY21, peaking at RM5.99 in April 2021 for Ramadan, though these have begun to normalise.
AmInvestment Research also forecasts a recovery in local table egg prices in the second half, as Singapore resumes its import of local eggs and as the supply lag adjusts.
Also, broiler prices in Indonesia have recovered as a result of culling exercises in the third quarter (Q3) of FY20 and recovering spending power. Monthly ASPs in Indonesia have risen from lows of 14,000 rupiah (RM4.07) to more stable values of 17,000 to 22,000 rupiah (RM4.95 to RM6.40) since.
AmInvestment Research pointed out that meat was not so integral to the standard Indonesian diet, given Indonesia’s low meat consumption rate of 11.6kg per capita (in contrast, Malaysia boasts 52.3kg and Thailand 25.8kg rates).
As a result, the research unit believes that poultry consumption in Indonesia as a whole was significantly more sensitive to reductions in spending power as result of poor economic conditions.
“This is contingent on the country’s ability to keep Covid-19 cases in check. Daily cases in Indonesia have since moderated to levels of 4,000 to 6,000 daily cases, from a peak of 14,000 in January, ” it said.
Meanwhile, LHI’s The Baker’s Cottage contributions and consumer’s rising preference for takeaway and delivery should dampen the effects of MCO 3.0.
It said The Baker’s Cottage has proven its effectiveness as a channel to offload downstream produce in the first MCO in Q2 of FY20, selling on average 8,000 to 9,000 birds (in comparison to 4,500 birds pre-MCO).
Also, hotel, restaurant and cafe demand in MCO 3.0 is expected to be stronger than that of MCO 2.0 due to widespread adoption of takeaway and delivery based consumption by consumers.
As a proxy, The Baker’s Cottage has been able to maintain its revenue levels in Q1 of FY21 from the previous quarter, despite a tightening in movement controls.
Also, the group’s feed mill in Luzon, the Philippines with an initial capacity of 128,000 tonnes per annum is scheduled to come onstream in Q2 of FY21, and is expected to help support the operating profit margins of the livestock operations within the country. However, a jump in margins is not expected to occur until at least a year down the line, as current livestock capacity is still too low.
AmInvestment Research also pointed out that risks include the feed mill segment no longer riding on elevated margins as result of rising raw material prices, Covid-19 case resurgence and further expansion plan delays.