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Thursday, November 24, 2016

Huatlai: Earnings Soared

Background

According to a recent Affin report, Huat Lai is a major integrated poultry player in Malaysia. It is Malaysia’s largest layer and the second largest broiler player in the country, behind unlisted Leong Hup. Based in Marlimau, Malacca, its operations span from the production of poultry feed, the breeding of day old chics, broilers, layering and also downstream processing of chicken. Huat Lai has intentions to further beef up its boiler and layering capacity with planned capex of RM80-100m over the next 2 years.

From Company's website

It announced a sterling set of results 2 days ago. Prior to that, its major shareholders, the Lim Brothers had offered to buy up the remaining shares not owned by them (about 25%) at RM5.00 apiece. For more, go here.

Industry Outlook

In QE30/9/2016, the  prices of chicken egg were quite volatile while prices of meat were relatively stable. In the current quarter, prices of egg has been sliding while prices of meat has recovered some of the lost ground. See Graph 1 below.

Graph 1: Price charts of chicken egg and meat from June to November 2016 (Source:
Jabatan Perkhidmatan Veterinar)



Graph 2: Price charts of chicken egg and meat for the past 4 years  (Source:
Jabatan Perkhidmatan Veterinar ) 

Financial Performance

For QE30/9/2016, Huatlai's net profit rose 221% -o-q or 245% y-o-y to RM45 million while revenue rose 12% q-o-q or 6% y-o-y to RM441 million. The improved profits for the current quarter was mainly attributed by improved selling prices of eggs and higher average selling prices of broilers as compared to the preceding quarter due to the shortage in the supply of poultry products in the market.


Table: Huatlai's last 8 quarters' result

Over the past 14 quarters, we can see that revenue has been on steady rise while profits have also been rising but on a zigzag pattern.


Graph 3: Huatlai's last 14 quarters' results

Latest Financial Position

Huatlai's financial position is stretched as at 30/9/2016, with current ratio at 0.8 times and gearing ratio at 1.4 times. The reason for this is due to its aggressive expansion plan and a small paid-up capital of RM86.6 million (comprising of 86.6 million shares). 

Valuation

Huatlai(closed at RM4.97 today) is trading at a PER of 7.6 times (based on last 4 quarters' EPS of 65 sen). This compares favorably to Teoseng and LTKM which are trading at PER of 14 and 13 times respectively. If Huatlai trades up to a PER of 13 times, its fair value could be RM8.45.

Technical Outlook

Huatlai is in a long-term uptrend. Its immediate resistance will be at the psychological RM5.00 (which is also the offer price for the buy-out by the Lim Brothers). Beyond that, it may test the November 2015 high of RM5.28. 


Chart 1: FGV's weekly chart as at Nov 23, 2016_4.00 (Source: Shareinvestor.com)

Conclusion

Based on good financial performance, attractive valuation and positive technical outlook, Huatlai is a good stock for long-term investment. I think we should not be deterred by the presence of the buy-out offer at RM5.00, which under-valued the stock. If the offerors are keen to privatize Huatlai, they may have to raise the offer price to get more acceptance. The risk is that the offer lapsed and the share price drops back. If that were to happen, then the share price will have to find its fair value, which I hope will eventually be closer to my estimate of RM8.45.

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

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