Leong Hup’s prospects turning more positive from recovery in prices, expansion plans

KUALA LUMPUR : Leong Hup International Bhd’s (LHI) prospects have been viewed as turning more positive, driven by the recent recovery in poultry product prices in the Southeast Asian region and its aggressive downstream expansion plan.

In a report, Hong Leong Investment Bank Bhd’s research team (HLIB Research) commented: “We are turning more positive on LHI’s earnings prospects, on the back of recent recovery in poultry product prices in the Southeast Asian region and its aggressive downstream expansion plan (via the expansion of The Baker’s Co age outlets).”

It pointed out that LHI’s downstream venture, via the expansion of TBC outlets (from 53 outlets currently to 80 outlets by end-2020, and 300 outlets by end-2023) allows LHI to mitigate the volatile poultry product prices, and hence stabilising earnings at Malaysian operations over the longer term.

“Based on our estimates, LHI’s downstream segment will consume at least 30 per cent of its broiler supply by 2024, which at the same time, indicates that at least 30 per cent of its broiler supply in Malaysia will no longer subject to price volatility,” it said.

Despite the intense competition among the bakery businesses, HLIB Research noted that LHI’s management is confident on its business model, as TBC has remodelled its business and repositioned itself to “hybrid concept’’ bakery, with roast chickens being its anchor product.

“LHI will embark on its outlet expansion in the suburban areas of Klang Valley and Southern region (where rental is cheaper and competition is less intense vis-a-vis the urban areas), and the prices of its products (in particularly, chicken products) are priced more affordably relative to most other (if not all) bakeries and/or quick service restaurants,” it added.

The aggressive downstream expansion plan will incur an additional capex of RM35 million to RM40 million per annum over the next four years, and HLIB Research believed LHI would not have issues in funding this, as LHI has already delayed part of its group expansion plans in FY20 to FY21.

New venture aside, the research team noted that poultry product prices have recovered swi ly in Southeast Asia since mid-May, thanks to easing lockdown measures (which have resulted in a strong demand recovery for poultry products) and supply chain adjustment.

“While it remains questionable if current high poultry product prices