Largest fully integrated poultry producer in Southeast Asia. Leong Hup International (“LHI”) is the largest fully integrated producer in the entire poultry supply chain. It covers livestock feed production, poultry breeding, broiler farming, layer production, the development of further processed poultry products, and quick-service restaurants. MIDF says the comprehensive approach enables the group to balance downside risks at different stages of the value chain through diverse operations. LHI operates not only in Malaysia and Singapore but also in other fast growing countries in Southeast Asia like Indonesia, Vietnam, and the Philippines.
This widespread presence not only mitigates potential risks in specific operations but also positions LHI to capture a significant market share in the underserved demand for poultry products.
Meanwhile, the raw material costs account for a substantial 83-85% of the total production cost for livestock feed. Livestock feed formulation involves 25-40 ingredients, with the composition varying based on the life cycle and type (broiler or layer) of the livestock. Notably, 90% of these ingredients are sourced internationally, with corn (50%) and soybean meal (28%) being the primary contributors. MIDF expects that the impact of global agricultural commodity fluctuations on LHI’s feedmill business is manageable due to its cost-plus-margin model, as any increase in raw material costs is passed on to the livestock producer (customer of Feedmill).
In Malaysia, 70% of the feed produced in LHI’s Feedmill is for internal use (usually sold in bulk), while the remaining 30% is for other poultry players, either packed in 50kg bags or in bulk based on customer orders and the type of the farmhouse.
Given the persistent oversupply situation in Indonesia, where the prices of live birds and Day-Old Chicks (DOC) in Java plummeted to January 2023 levels, we have adjusted our FY23F-24F earnings forecast downward by -9.7%/-7.3%/-5.9% respectively. This is after factoring the reduced sales of livestock and poultry products in Indonesia.
Cheap valuation and high dividend yield. Leong Hup is currently trading at a FY24F PER of 5.4x, significantly below the
5-year historical -1SD PER of 8.4x. Nevertheless, the FY24F dividend yield is very attractive at 5.30%, well above the current
10-year MGS yield of 3.81%.
The house is keeping its buy call on the stock with a revised TP of RM0.83 (from RM0.90). Despite facing multiple headwinds, MIDF is positive about Leong Hup’s FY24F outlook, underpinned by the resilient demand for poultry products due to the staple food nature of its product the normalization of margins for its Malaysian operations following removal of price
controls for broiler chicken, and the global softening of commodity prices for livestock feed, thereby improving the margin for the livestock segment.
