Tuesday, October 9, 2018

LAY HONG GREATLY EFFECTED BY HIGHER RAW MATERIAL COSTS

Higher raw material costs driven by the weaker ringgit, particularly for corn feed, are expected to hit integrated livestock player Lay Hong Bhd significantly this financial year. Furthermore, the potentially lower selling prices for table eggs could negate the potential gains from the higher sales of their other products.

The company is involved in the production and sale of eggs, chickens, ready-to-eat meals and processed chicken products such as nuggets and sausages, among others. It is also involved in the retail sector as it owns the G-Mart chain of supermarkets in Sabah.

Lay Hong’s revenue grew in the first quarter of FY19 (1QFY19) as it benefitted from a higher quantity of eggs sold following the completion of a new farm which boosted production capacity to three million eggs a day. Topline was also driven by higher quantities sold and better prices for its processed frozen products and pasteurised liquid eggs in the quarter.

However, lower egg prices and higher raw material prices combined to drag down their bottomline. Streets suggest that a 1% decrease in egg prices can cause earnings to decrease by a similar quantum, while a 1% increase in feed costs can potentially reduce earnings by 4% to 5%.

This was quite evident in Lay Hong’s 1Q results. Its revenue for the period increased by 8.9% to RM199.3 mil from RM183 mil in the previous year’s corresponding period. However, its bottomline contracted significantly by 62% to RM2.3 mil from RM6.2 mil over the same period under review.

Lay Hong executive director Yap Chor How admits that the sharp increase in raw material prices over the past year (FY2018) is, and will be, a significant problem for the company in FY19.

Yap admits the raw material price increase is quite serious and management is trying to find remedies in terms of feed formulation and operational efficiencies so that Layhong can weather this price increase.

On a year-on-year (yoy) basis the price per metric tonne (MT) of corn rose from around RM700 to about RM900 plus recently (end Sept 2018). This translates into about 30% increase in just corn costs for Lay Hong.

Worryingly, Yap sees prices rising further as weather drives down corn inventories worldwide. The biggest impact on the crop is the weather and this will be the biggest challenge in production in the coming year (2019)… at this rate prices could potentially breach new levels in the next six to 12 months from Oct 2018.

Corn represents about half of Lay Hong’s costs.

While high raw material prices would be unwelcome at any time, it has hit Lay Hong at a particularly bad time as it ramps up its egg production levels. Feed costs are going up in tandem with its production levels. Given that Lay Hong has already invested in expanding its production capacity, it cannot slow its production too much.

The ringgit’s depreciation against the USD has made matters worse for the livestock player. Like most commodities, corn is denominated in USD.

Yap admits that in view of these challenges, Lay Hong is gearing up for a weaker set of results in FY19. LayHong will still be profitable but it will not be as good as in FY18.

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