KUALA LUMPUR: Kenanga Investment Bank Bhd has called 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 improve capacity.
“Furthermore, the completion of a new processing plant would boost earnings of the joint-venture with NH Foods Ltd. We believe this would translate to core earnings growth of 85 per cent and 34 per cent for financial years 2018 and 2019 respectively,” analyst Clement Chua said in a research note today.
Lay Hong shares closed Monday at RM0.955 a share.
The report said egg prices were depressed in 2016 due to oversupply, but industry-wide production cuts arising from a potential avian influenza outbreak in early 2017 allowed prices to recover to higher levels.
“Grade ‘A’ egg prices are estimated to be priced at RM0.38 each on average for Feb 2018 against RM0.35 each in Jun 2017. 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 plans 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, aims to penetrate into 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 roll out by 2H19. Processed foods are the largest contributor to group integrated livestock farming sales at about 55 per cent in FY17,” Chua said.
Kenanga anticipates Lay Hong sales growth of 21 per cent and 18 per cent in financial years 2018 and 2019 respectively, driven predominantly by better egg contributions and processed food demand.
Operating margins expansion arising from better efficiency gains would buoy the flattish retail segment performance of the group, the report added.
“Assuming FY17 dividend payout ratio of about 20 per cent, 2018 and 2019 will see 1.0 sen and 1.5 sen dividend payouts or yields of 1.1 per cent and 1.6 per cent respectively,” it added.