Last week Malaysia Competition Commission issued a Notice of proposed decision to Leong Hup Feedmill Malaysia Sdn Bhd (LFM) and four other feed millers that they had been provisionally determined to have violated Section 4 of the Competition Act 2010 (Act 712). As far as the stock is concerned, MIDF views the scenario as wait and see and maintains neutral with a target buy of RM0.47.
Let’s have a look at how the notice implicates and what will the worst-case scenario be. The notice claimed that LFM allegedly participated in anticompetitive agreements and/or coordinated actions in raising the price of poultry feed, between early 2020 and mid-2022. Based on section 4(1) of the Act, it is prohibited for businesses to enter into a horizontal or vertical agreement, if it significantly lessens, prevents, or distorts competition in any market for goods or services. Bourse fillings. Leong Hup stated the anticipated financial penalty and proposed directions are not yet final. The group will address the matter with an external legal counsel, submit written representations within the allotted 30-day time frame, and give an oral argument before MyCC.
After hearing and considering the representations along with the evidence acquired throughout the investigation, MyCC will then make its final decision about whether the Act was violated or not. Not a good case? The group contended that the cost hikes of feed millers are mainly due to Malaysian feed mills importing the same raw materials from overseas. This is due to oligopoly structure of feedmill, where businesses manufacture homogeneous products at a fixed marginal cost. Feed millers compete by establishing pricing such that when one increases, the others follow suit. Hence, the group emphasizes that just because all increase around the same time does not equate to price fixing.
Worst case scenario. Based on section 40(1) of the act, if MyCC has determined that section 4 has been violated after the
hearing, the commission may impose a financial penalty of not to exceed 10% of the group’s feed mill revenue for the
relevant period. We expect a worst-case financial penalty of between RM74.4m-RM744.4m premised on a financial penalty
of between 1%-10% of LHIB’s feed mill revenues from early 2020 to mid-2022 (Exhibit 1). Note that LHIB only operates
a feed mill in Malaysia. The financial penalty could potentially drag LHIB’s FY22 revenue by -0.9 to -9.0% and net earnings by -63.0% to -633.0%.
Maintain NEUTRAL with an unchanged TP of RM0.47. MIDF kept its earning estimate, given that the findings are
provisional and the proposed direction has not yet been decided. TP is based on EPS of 3.2 sen at a PER of 14.6x for the FY22E (-1SD of its 2-year historical average). The research house is aware that the margin compression will continue in the near term on the back of the Feedmill’s continued high raw material prices along with the price controls for chicken and eggs in Malaysia.
Despite that, MIDF is positive about LHI’s long-term prospects, underpinned by its: (i) vertical integration of poultry, eggs, and livestock feed; and (ii) geographical diversification across Malaysia, Singapore, Indonesia, Vietnam, and the Philippines. Hence, we maintain our NEUTRAL call on LHIB.
