KUALA LUMPUR: MIDF Research holds a favourable view on the impact of worldwide fluctuations in agricultural commodity prices on Leong Hup International Bhd's feedmill business.
This is attributed to Leong Hup's cost-plus-margin model, which enables the passing on of any rise in raw material expenses to livestock producers.
"In Malaysia, 70 per cent of the feed produced in Leong Hup's feedmill is for internal use (usually sold in bulk), while the remaining 30 per cent is for other poultry players, either packed in 50kg bags or in bulk based on customer orders and the type of the farmhouse.
"The raw material costs account for a substantial 83 per cent to 85 per cent of the total production cost for livestock feed," said MIDF Research.
It added that the livestock feed formulation involves 25-40 ingredients, with the composition varying based on the life cycle and type (broiler or layer) of the livestock.
"Notably, 90 per cent of these ingredients are sourced internationally, with corn (50 per cent) and soybean meal (28 per cent) being the primary contributors," it added.
Overall, MIDF Research is positive about Leong Hup's financial outlook for the fiscal year 2024 (FY24F) because it is supported by the robust demand for poultry products, given the essential nature of its goods as staple food.
Another supporting factor is margins normalisation in Leong Hup's Malaysian operations, attributed to the lifting of broiler price controls and global decline in commodity prices for livestock feed, contributing to improved margins in the livestock segment.
Moreover, the current disturbances in the worldwide supply chain, resulting from the Red Sea crisis and prolonged congestion in Brazil's primary port, are anticipated to be within Leong Hup's capacity to handle.
"Leong Hup has ample storage for raw materials, with eight silos located in its feedmill plant at Port Klang, each capable of holding 250,000 tonnes.
"We gather that Leong Hup is one of the largest buyers from vessels at Port Klang, acquiring 33 per cent of the total grains carried per vessel.
"With abundant storage at Port Klang and a predominant role as the primary feed raw material buyer, we believe that Leong Hup feedmill plant in Port Klang is well-positioned to guarantee a plentiful supply of feed for both internal use and external customers in Malaysia," it added.
MIDF Research has adjusted Leong Hup's target price from 90 sen to 83 sen while affirming a "Buy" recommendation.