TA Research said LHI’s financial standing was expected to see no significant impact until its appeal result with the CAT is disclosed.
PETALING JAYA: Leong Hup International Bhd
’s (LHI) pro forma net gearing ratio is expected to deteriorate to 0.96 times from 0.7 times, assuming the group fully utilises its cash reserves for the penalty settlement imposed on it by the Malaysia Competition Commission (MyCC).
Last week, MyCC issued cumulative fines of RM415.5mil on five feed millers, namely, LHI’s wholly-owned subsidiary, Leong Hup Feedmill Malaysia Sdn Bhd (LFM), Malayan Flour Mills Bhd’s partially-owned Dindings Poultry Development Centre Sdn Bhd, PPB Group Bhd’s 80%-owned FFM Bhd, Gold Coin Feedmills (M) Sdn Bhd, and PK Agro-Industrial Products (M) Sdn Bhd for fixing the price of chicken feed.
This was the result of the investigation initiated by MyCC in August 2022, targeting five companies suspected of manipulating feed prices by sharing sensitive commercial information between early 2020 and mid-2022.
Of the total RM415.5mil fine, FFM was fined RM42.7mil; Gold Coin RM97.5mil; LFM RM157.5mil; PK Agro RM47.8mil and Dindings RM70mil.
In its statement, MyCC claimed it discovered a calculated strategy employed by the above enterprises to create the illusion of rising poultry feed costs due to increased raw material expenses.
Despite their different formulations and raw material composition, the companies had a deliberate collective alignment in price increments.
In response, LHI said MyCC’s finding of infringement was without merit and the group would take the necessary and appropriate action to challenge the decision and apply for a stay.
This will be carried out through the submission of an appeal application to the Competition Appeal Tribunal (CAT).
TA Research said LHI’s financial standing was expected to see no significant impact until its appeal result with the CAT is disclosed, which will likely be in the third quarter of 2024.
Should the outcome of the appeal turn out to be unfavourable to LHI, the research house projects that LHI’s financial position will be affected.
“Despite a cumulative penalty of RM415.5mil, with LHI’s subsidiary bearing 38% of the total, LHI refuted the accusations, claiming a lack of merit and that it would challenge the authority’s decision within the 30-day grace period allotted for submitting an appeal application to the independent CAT.
“It has recorded strong cash flow from operations over the past five years and has consistently maintained an approximate annual cash balance of around RM564mil.
“Assuming LHI fully utilises its cash reserve for the penalty settlement, its pro forma net gearing ratio will deteriorate to 0.96 times from 0.7 times,” TA Research said.
TA Research has maintained its “buy” call on LHI with a target price of 67 sen per share, based on a recalibrated price-to-earnings ratio of nine times the estimated earnings per share for 2024.
