HLIB Research downgrades Leong Hup on weaker demand, prices for poultry products

KUALA LUMPUR (April 15): Amid the lockdowns in Southeast Asia, integrated poultry player Leong Hup International Bhd is seeing weaker demand and prices for poultry products.

Hong Leong Investment Bank Bhd Research (HLIB Research) analyst Chye Wen Fei, in a note today, wrote that should the lockdowns be lifted soon, it is unlikely for the demand and average selling prices (ASPs) to recover swiftly to pre-lockdown level as he believes social distancing practices will likely remain.

Accordingly, in anticipation of weak near-to-medium term earnings prospects, the research firm has downgraded Leong Hup to a “hold” rating, with a lower target price of 56 sen, from 92 sen previously, based on revised 15 times financial year ending Dec 31, 2020 (FY20) earnings per share of 3.7 sen.

Given the weak demand and prices, which will likely persist until beyond 1H20 and depending on how soon Covid-19 cases will subside, Chye has slashed the FY20 to FY21 core net profit forecasts by 27.6% and 22.8% to RM135.5 million and RM175.9 million respectively, largely to account for lower ASPs and sales volume assumptions for day-old-chicken and broiler.

“While expansion plans remain intact for now, management shared that completion dates of the current expansion projects will likely be delayed, as the lockdown has resulted in construction activities being suspended,” said Chye.

“Besides, we do not discount the possibility of LHI ( Leong Hup) scaling back some of its regional expansion plans (which have yet to be embarked on), in an attempt to conserve cash flow amidst a challenging operating environment,” he added.

For FY19, Leong Hup saw its net profit fell 19.1% to RM150.58 million, from RM186.19 million in the year-ago period, despite a 5.4% higher revenue of RM6.05 billion — a record high, from RM5.75 billion.

The company attributed the lower net profit to compressed margins at its livestock and poultry segment.

At 10.25am, Leong Hup shares were unchanged at 57.5 sen, valuing the counter at RM2.1 billion. The counter has been slashed nearly half or 47.7% from its initial public offering price of RM1.10 per share in May last year.