KUALA LUMPUR: Leong Hup International Bhd's earnings forecasts from now until financial year 2025 have been cut by MIDF Research to reflect the latter's cautious outlook.
MIDF Research said Leong Huo had been bogged down by persistent margin compression caused by rising feed, labour and electricity costs as well as the ongoing retail price ceiling for chicken and eggs in Malaysia.
Furthermore, the firm said Leong Hup's high gearing ratio of 0.8 times posed the risk of increased finance costs, potentially further compressing the margin in the current rising interest rate environment.
"On a positive note, the company's vertical integration of poultry, eggs and livestock feed, along with geographic diversification, can partially offset potential downsides," it said.
According to MIDF Research, Leong Hup had maintained a total capital expenditure (capex) target for FY23 at less than RM200 million compared to RM291.5 million in FY22, given the current challenging business environment.
Leong Hup's capex for FY21 stood at RM345.9 million, RM498.6 million for FY20 and RM400.2 million for FY19.
"Post analyst briefing, we cut our earnings expectation for FY23 by 35.5 per cent, FY24 by 33.5 per cent and FY25 by 30.3 per cent to reflect our cautious outlook.
"This was after factoring in weaker sales volume performance from the Indonesia operation, and higher animal feed, labour and finance costs.
"We downgrade our call to 'neutral' from 'buy' on Leong Hup. Downside risks are a substantial increase in the cost of raw materials; adverse regulatory change; and fierce competition," MIDF Research noted.