‘BUY’ CALL FOR LAY HONG
Kenanga Investment cites turnaround in egg prices and sets RM1.20 fair value
KENANGA Investment Bank Bhd has initiated a “trading buy” on Lay Hong Bhd with a fair value of RM1.20, citing a turnaround in egg prices and the company’s investment to boost capacity.
“The completion of a new processing plant would boost earnings of its joint venture with NH Foods Ltd. We believe this would translate to core earnings growth of 85 and 34 per cent for financial years (FY) 2018 and 2019, respectively,” said analyst Clement Chua in a note yesterday.
Lay Hong shares closed at 95.5 sen on Monday.
The report said egg prices were depressed in 2016 due to oversupply, but industry-wide production cuts arising from a potential avian influenza outbreak early last year allowed prices to recover to higher levels.
“Grade ‘A’ egg prices are estimated to be priced at 38 sen on average in February against 35 sen in June last year.
“Barring sudden shifts in consumption habits, we believe the normalised demand and supply would benefit sales in this segment from an organic demand growth coinciding with national population growth,” Chua added.
He said Lay Hong planned to invest about RM40 million to expand production of egg products and broiler capacity.
The company’s partnership with NH Foods, which specialises in processed Japanese foods, was to penetrate the halal export markets and capitalise on the 2020 Tokyo Olympics.
“Under this agreement, the group provides the necessary halal production capabilities via the construction of a new food processing plant.
“The plant will double the group’s processing capacity and is expected to be rolled out by second quarter of next year. Processed foods are the largest contributor to group integrated livestock farming sales at about 55 per cent in FY17,” said Chua.
Kenanga expects Lay Hong sales growth of 21 and 18 per cent in FY18 and FY19, respectively, driven mainly by better egg contributions and processed food demand.
Operating margins expansion from better efficiency gains would buoy the group’s flattish retail segment performance, the report added.
“Assuming FY17 dividend payout ratio of about 20 per cent, 2018 and 2019 will see one sen and 1.5 sen dividend payouts or yields of 1.1 and 1.6 per cent, respectively,” it added.