KUALA LUMPUR: Near-term headwinds remain for Leong Hup International Bhd as the government recently moved to ban the export of chicken from June 1, 2022, in an attempt to manage food inflation in the country.
Hong Leong Investment Bank (HLIB) research expects the ban to hurt Leong Hup's bottom line even as the prices of key inputs, especially soybean meal and corn, remain escalated due to high fertiliser prices and tight supply.
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Leong Hup's recent earnings missed expectations, said HLIB, at only 14.2% and 17.5% of consensus' and house's full-year estimates as higher-than-expected feed, depreciation and finance costs impacted the bottom line.
The research firm, which downgraded its call on Leong Hup to "hold", lowered its target price to 56 sen after slashing its FY22-23 core earnings forecasts by 19.7% and 26.4%.
However, it said it expects Leong Hup's performance to improve from 3Q22 as prices of key inputs (in particularly, soybean meal and corn) have weakened since 1Q22, and this will result in lower feed costs.
"Besides, we believe demand for poultry products will remain robust, as economic activities in all LHI’s operating countries have resumed with minimal restrictions," it said in a company update.
Meanwhile, RHB Research has a more optimistic outlook on Leong Hup as it anticipates an earnings rebound as early as 2Q22.
It said this will be "underpinned by the effects of the cost pass-through, and stronger consumption recovery from the better containment of the pandemic and the broader reopening of economies across its operating countries".
The research firm, which maintained its "buy" call on a lowered target price of 61 sen, said prospects will improve further as the regional poultry industry is set to consolidate.
Over the longer-term, it expects the extremely challenging operating environment caused by the pandemic and cost inflation to phase out financially weaker players.
"This paves the way for larger-scale regional operators with solid fundamentals and robust expansion plans like LHI to extend its reach and gain market share.
"Current valuation may suggest that most of the negatives are already priced in, and we think LHI’s presence should place it in a good position to capture the region’s poultry consumption recovery," it added in a report.