Leong Hup, other chicken companies may be under siege

KUALA LUMPUR May 27 - The chicken shortage situation in the country continues to scalp casualties.

This time, poultry-based firms are beginning to feel the pinch of the chicken shortage.

They include Leong Hup International Berhad, Lay Hong Food Corp, Huat Lai Resources, LTKM Berhad, QL Resources Berhad and other small chicken breeders.

After defending it's position amid the chicken shortage controversy, their shares are beginning to slide.

"Leong Hup share prices for example have weakened to 50 sen from 70 sen before and it will continue to soften as the country's chicken crisis  continues to worsen," trader Nor Hamidi Yusoff told DagangNews.com.

Malaysia is facing a severe chicken glut situation due to rising chicken feed prices namely corn, soyabean and wheat which are mainly imported.

The poultry breeders are feeling the squeeze because while raw materials prices are soaring, they are not allowed to increase chicken prices as the commodity is a controlled item under the Price Control Act 1961.

Meanwhile, Maybank IB Research said integrated poultry farmer Leong Hup International Berhad will be under pressure following the export ban.

The research bank said domestic poultry price controls have hindered the industry’s ability to raise poultry average selling prices (ASPs) amid material spikes in raw material costs such as chicken feed.

Set against the latest government ruling to bar poultry exports from June 1, Maybank IB Research has raised concerns that such a move would adversely impact Leong Hup's poultry supply to Singapore.

Bleak prospects beckon for Leong Hup evident from its dismal first quarter ended March 31, 2022.

The research house has also downgraded Leong Hup to “hold” (from “buy” previously) on the basis of prolonged regulatory restrictions with a lower target price of 50 sen (from 76 sen previously).

“The recent Government announcement on the poultry export ban from Jun 1 onwards could also further exacerbate Leong Hup’s weak earnings as it may have to halt its poultry supply into Singapore,” analyst Jade Tam said in a results review.

“Note that Singapore operations accounted for 10 percent and 4 percent of Leong Hup’s group revenue and EBITDA (earnings before interest, taxes, depreciation, and amortisation) respectively as of end first quarter 2022.

According to Maybank IB Research, Leong Hup’s first quarter 2022 core net profit of RM20 million which is a 71 percent drop year-on-year came in at below expectations.

The earnings disappointment was largely due to compressed margins at its livestock and feed mill segments. 

However, the group’s first quarter of 2022 revenue of RM2.1 billion which is a 25 percent was in-line with the research house’s 2022 revenue estimate.

Meanwhile, Hong Leong Investment Bank Research expects near-term headwinds to remain for Leong Hup on the back of the recent Government’s move to ban the exports of chicken in an attempt to manage food inflation and ensure food security in the country.

“Prices of key inputs (particularly, soybean meal and corn) will likely remain escalated (arising from high fertiliser prices and tight supply of corn and soybean),” projected analyst Chye Wen Fei.

Like Maybank IB Research, HLIB Research also downgraded Leong Hup to “hold" from “buy” previously with a lower target price of 56 sen (from 66 sen previously).

“Despite the weak first quarter 2022 showing, we believe Leong Hup’s performance will improve from the third quarter of 2022 onwards as prices of raw materials (in particular, soybean meal and corn) have (gradually) weakened since the first quarter in 2022, hence will result in lower feed costs,” forecasted the research house.

“Besides, we believe demand for poultry products will remain robust as economic activities in all of Leong Hup’s operating countries have resumed with minimal restrictions.”

It will be a challenging time for all poultry farmers in the next several months.

Perhaps they should emulate Felda Global Ventures Holding Berhad which announced yesterday that it will start to grow corn.

It is time that local chickens start to eat locally grown corns so that imports of pricey corns as chicken feed can be reduced. – DagangNews.com