PETALING JAYA: Leong Hup International Bhd’s (LHI) financial performance will improve from the third-quarter 2022 (3Q22) onwards amid near-term headwinds.
The near-term headwinds include the government’s recent move to ban the exports of chicken starting from June 1, 2022 in an attempt to manage food inflation and ensure food security in the country, will likely hurt its bottomline. Prices of inputs particularly, soybean meal and corn were high but have since weakened since 1Q22, and this will result in lower feed costs.
Hong Leong Investment Bank Research believes demand for poultry products will remain robust as economic activities in all LHI’s operating countries have resumed with minimal restrictions. LHI’s 1Q22 results were disappointing according to RHB Research as the sharp rise in production costs could not be passed on immediately.
In 1Q22, LHI reported core net income of RM20.4mil (a 71% decline year-on-year) due to soaring input cost of livestock and poultry feed products. However, it expects margins to normalise going forward, as costs are gradually passed on and higher consumption supports a quick earnings rebound.
It believes LHI is in a good position to capitalise on the regional consumption recovery and potential industry consolidation, judging from its well established presence and solid fundamentals.
RHB said in the longer run it foresees a consolidation in the regional poultry industry, as the extremely challenging operating environment caused by the pandemic and cost inflation should phase out the financially weaker players. This will pave the way for larger-scale regional operators with solid fundamentals and robust expansion plans like LHI to extend its reach and gain market share.
It said current valuation may suggest that most of the negatives are already priced in, and it believes LHI’s presence should place it in a good position to capture the region’s poultry consumption recovery.
MIDF Research has a “neutral’’ stand on the stock at a target price (TP) of 59 sen a share.
It said its TP is based on financial year 2022 (FY22) earnings per share of 4.2 sen pegged to price to earnings ratio of 14 times, which is the two-year historical average. It said it likes LHI due to its economies of scale, vertical integration and geographical diversification.
HLIB cut its FY22-FY23 core earnings forecasts by 19.7% and 26.4%, mainly to account for higher feed cost, finance and depreciation charges. It downgraded its call to a “hold’’ from a “buy earlier, with a TP of 56 sen.
RHB has a “buy’’ call with a new TP of 61 sen from 83 sen earlier.