Investment Highlights

• We initiate coverage on Teo Seng Corporation Bhd (TSCB) with a BUY recommendation at a target price of RM1.15. Started off as a sole proprietor of broiler chicken rearing in 1978, TSCB has accumulated close to 40 years of experience in the poultry farming industry and subsequently rose to become one of the largest chicken egg producers in Malaysia. With 3.5 mln eggs produced in 2016, TSCB commands 8.1% and 23.5% market share in Peninsular Malaysia and Singapore respectively.

• We like TSCB for its position as one of the leading poultry companies in Malaysia with an established track record, alongside its steady growth plans until 2020. In addition, TSCB is backed poultry giant Leong Hup Holdings Bhd that provides an advantage to TSCB in layer breeds selection.

• The group is in the midst of expanding its businesses, focusing on: (i) increasing and upgrading the number of farms, (ii) renovation and warehouse expansion of its paper tray operations, (iii) setting up a new drug factory and office, and (iv) enhancement of the chicken manure conversion operation.

• We expect TSCB to deliver a commendable earnings recovery with a net profit of RM20.2 mln in 2018 and RM24.2 mln in 2019 (+20.0% Y.o.Y) respectively. Revenue, meanwhile, is expected to grow at a three-year CAGR of 5.7% to RM473.6 mln by 2019. We arrive at our target price by ascribing a target PER of 17.0x to its forecast FY18 EPS of 6.7 sen. The assigned PER represents a 15.0% discount to its’ peers average PER of 20.0x, due to the group’s small scale of business.

Recommendation

We like TSCB for its position as one of the market leaders in the poultry industry in Malaysia. Over the years, the group has evolved from a sole proprietor of broiler chicken rearing into one of the largest commercial chicken egg producer with 4.3 mln birds, laying approximately 3.5 mln eggs daily in 2016. As of 2016, TSCB commands 8.1% and 23.5% market share in the poultry industry in Peninsular Malaysia and Singapore respectively.

We reckon that the group’s expansion plans until end-2020 bodes well for the company to capture additional market share. The progressive increase in egg production to 4.5 mln eggs by end 2020 will be well absorb by the gradual improvement in demand as demonstrated by Malaysia and Singapore’s eggs consumption per capita growth at a nine-year CAGR of 3.7% and 1.5% to 385 and 338 eggs respectively in 2016.

The group’s operations are also overseen by a management team with vast knowledge and skills, having close to 40 years of experience in the poultry industry (please refer to Appendix 1 for full profile of its Board of Directors). In the meantime, the group is also backed by its major shareholder – poultry giant Leong Hup Holdings Bhd that provides an advantage in layer breeds selection and thus providing a positive impact on the quality of its eggs.

At current price of RM0.95, we reckon that its share price is attractive, trading at 2018 PER of 14.1x which is below its peers’ average of 20.0x. In the meantime, we are also upbeat on TSCB expansion plans, backed by its established track record of successful expansion plans in the past.

At the target price of RM1.15, TSCB will trade an implied PER of 17.1x and 14.2x for 2018 and 2019 respectively, which is slightly below of its peers, but is fair in our opinion, given its smaller scale of business.

Investment Risk

Risks to our recommendation include avian influenza – a viral infection that can infect not only birds, but also humans and other animals. Mass culling will be required as the entire flock is removed and replaced, causing a reduction in its egg production.

Chicken feeds (mainly soybean and maize) makes up 70% of production cost. The stronger commodity prices (soybean and maize) will negatively impact its margins and vice versa.

A firmer Ringgit against the U.S. Dollar could impact the group’s bottom line. A recovery in the local currency against the Greenback will positively impact on the group’s earnings and vice versa, as the chicken feeds are purchases are denominated in U.S. Dollars.

Source: Mplus Research - 19 Mar 2018