PETALING JAYA: Leong Hup International Bhd
’s near-term earnings outlook appears bullish, given improving market conditions in Indonesia and robust performance of its anchor operations in Malaysia, says RHB Research.
The brokerage firm also expects the robust momentum to sustain into the third quarter of 2023 (3Q23) following the recent sharp quarter-on-quarter (q-o-q) earnings jump in 2Q23.
“This is taking into account the strong average selling price (ASP) recovery in Indonesia on the back of more balanced supply-demand dynamics,” said RHB Research in a note to clients yesterday.
It added that the group’s Malaysian operations should see more solid numbers in view of the stable demand and easing feed costs.
The current prices of corn and soybean meal, which are the key ingredients of poultry feed, have fallen by 28% and 17% off 2023’s year-to-date peak, respectively.
Hence, this should support profit margin of livestock and feed mill businesses across all operating countries, noted RHB Research.
In Budget 2024, the government announced the cessation of the ceiling price regulation and subsidy programmes for poultry products, including chicken and eggs.
The research firm said: “We believe this is neutral for the poultry industry and Leong Hup’s Malaysian operations, as we expect the ASP adjustments post-price flotation to offset the impact of subsidy removals.”
That said, RHB Research did not expect prices of poultry products to spike significantly when the prices are floated, taking into account eased commodities prices and more stable supply-demand industry dynamics.
“As such, we believe demand will remain resilient, considering poultry products are the cheapest source of protein,” it noted.
RHB Research has made no changes to Leong Hup’s earnings forecast pending its results announcement, slated on Nov 28.
Meanwhile, the brokerage said it believed the industry consolidation could have been accelerated by the pandemic and hyper commodity inflation, facilitating market share gains for major players such as Leong Hup.
“We foresee it capturing the growing demand for poultry products in the Asean markets with its continuous capacity expansion,” it added.
RHB Research has maintained a “buy” call on Leong Hup, given its exciting near-term earnings prospects.
It has also raised the stock’s target price (TP) to 72 sen from 63 sen previously, an 18% upside and about 3% of financial year 2024 yield.
“We raise our discounted cash flow-derived TP to 72 sen, after rolling over our valuation base year and reviewing our risk assumptions.
“We believe the valuation is justified by the exciting earnings momentum, supported by improving industry dynamics and growing market share,” it noted.
RHB Research opted not to stretch the valuation, given the volatile commodity market on the back of geopolitical tensions as well as the soft consumer spending impacted by elevated inflationary pressures.
The risks to its recommendation include a sharp rise in input costs and unfavourable supply-demand dynamics.
