LHI: Earnings Beat Expectations on Robust Core Markets, ‘Buy’ Rating Maintained

RHB Investment Bank has maintained its “BUY” recommendation for Leong Hup International (LHIB), with a target price of RM0.98, representing a substantial 53% upside from its last traded price of RM0.64. The firm’s 1H25 financial results were largely in line with expectations, driven by strong performances in key markets and underpinned by an improving poultry industry outlook.

Performance Review

For the first half of 2025, LHIB reported a net profit of MYR192 million, marking a 26% year-on-year increase. This figure accounts for 51-52% of both RHB’s and consensus full-year forecasts. Despite this strong performance, RHB has opted to keep its earnings forecasts and DCF-derived target price unchanged.

Revenue for 1H25 saw a 9% year-on-year decline to MYR4.3 billion, primarily attributed to a 17% drop in feedmill sales, a reflection of lower commodity prices. Furthermore, the Indonesian market experienced a 16% decline in revenue due to challenging conditions and lower average selling prices (ASPs). Group EBITDA eased 4% year-on-year to MYR518 million.

Regionally, robust growth in Malaysia, Vietnam, and the Philippines helped to offset a significant 67% plunge in contribution from the Indonesian segment. On a quarter-on-quarter basis, 2Q25 revenue and EBITDA also experienced a 4% and 1% decline respectively, mainly due to the persistent underwhelming performance in Indonesia and slower demand post-Lebaran.

Strategic Outlook

RHB anticipates that LHIB’s earnings and margins will normalize from the exceptionally strong FY24 base, which benefited from a sharp depreciation of the USD and a low effective tax rate. This normalization is expected given lower tax credits moving forward and the inherent cyclical and volatile nature of the poultry industry, particularly in Indonesia.

However, the overall fundamental outlook for the poultry industry has improved significantly. The phasing out of pandemic and commodity supercycles has led to the exit of smaller and weaker players, resulting in industry consolidation that strongly favors large industry participants like LHIB. This consolidation, coupled with LHIB’s robust balance sheet – with net gearing significantly improving to 0.43x in 2Q25 from 1.1x in FY22 – positions the company favorably to expand its market share and enhance efficiency through capacity expansion.

Key Risks

Potential downside risks to the recommendation include a sharp rise in input costs and unfavorable demand-supply dynamics within the industry.