Results Highlights

• Teo Seng’s 2Q2018 net loss narrowed to RM0.5 mln vs. a net loss of RM5.8 mln recorded in the previous corresponding quarter, due to the recovery in the average egg selling prices, coupled with the stabilising feed cost. Revenue for the quarter added 7.8% Y.o.Y to RM102.7 mln.

• The reported results came below our expectations, making up to only 28.8% of our previous estimated net profit estimate of RM20.2 mln. Meanwhile, the reported revenue came slightly below our expectations, amounting to 45.4% of our full-year forecast of RM479.7 mln. The variance in its bottom line was due to higher overhead cost arising from the group’s expansion plans, coupled with the slower sales.

• Segment wise in 2Q2018, the poultry farming segment’s pretax loss narrowed to RM3.0 mln vs. a pretax loss of RM4.9 mln, lifted by improved average egg selling prices, higher sales quantity and lower feed cost. The trading segment’s pretax profit grew 6.7% Y.o.Y to RM2.3 mln on higher demand for animal health products.

• As of 2Q2018, Teo Seng’s gearing is reduced to 68.0% (from 69.2% recorded in 1Q2018). Moving forward, we expect Teo Seng’s gearing level to remain above the 50.0% level as the group continues to hinge on external funds to cater for its expansion plans, targeting production of 5.0 mln eggs per day in 2022.

• A single tier interim dividend of 0.5 sen per share was declared in conjunction with the release of its quarterly results.

Prospects

Teo Seng’s egg production stood at 3.7 mln eggs per day in 1H2018 (relatively unchanged from end-2017). With the recent completion of a new feedmill plant, the group will now concentrate on ramping up its egg production, targeting daily production of 5.0 mln eggs by end-2022. Since peaking in January 2018, chicken egg prices have tumbled in 2Q2018, before staging a recovery in early 3Q2018 (see Appendix 1). Moving forward, we expect chicken prices to be fairly stable towards end-2018 as the demandsupply condition remains well balanced.

In the meantime, the group is targeting cost efficient measures by adopting automation processes in its daily operational activities. The investment in automated chicken manure belts in its farm houses is expected to be completed by 2019. This will reduce the reliance on foreign workers and could boost Teo Seng’s bottomline margins.

Over at the group’s major production cost, soybean prices have slumped in June 2018, averaging at RM38.61 per bushel in 2Q2018 (-3.7% Q.o.Q) after China retaliated by imposing a 25.0% import duty on U.S. soybeans after the U.S. imposed a similar tariff on US$34.0 bln worth of China products. In 2017, the U.S. exported approximately US$14.0 bln worth of soybeans to China.

Meanwhile, Maize prices remained stable, averaging at RM803.93 per tonne (+0.3% Q.o.Q) (see Appendix 2). Moving forward, we expect soybean prices to remain weak, trading below RM40.00 per bushel, whilst Maize prices are expected to remain above RM750.00 per metric tonne for the remainder of 2018 on improved demand for livestock feed and industrial processing.

Valuation And Recommendation

With the reported earnings coming below our expectations, we trimmed our earnings forecast by 30.8% and 20.2% for 2018 and 2019 respectively, accounting for the higher overhead cost, coupled with the lower average selling prices of eggs. Consequently, we downgrade Teo Seng to HOLD (from BUY) with a lower target price of RM0.90 (from RM1.15).

We rolled over our valuation metrics to 2019 and derive our target price by ascribing an unchanged target PER of 14.0x to its 2019 EPS of 6.4 sen. The ascribed target PER is at a 25% discount to its peers average of 18.7x due to its smaller market capitalisation. At current price of RM0.845, TSCB is trading at prospective PERs of 18.1x and 13.1x for 2018 and 2019 respectively and are already close to fair, in our view.

Risks to our recommendation include avian influenza – a viral infection that can infect not only birds, but also humans and other animals. Chicken feed (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 also affect the group’s bottom line. A recovery in the local currency against the Greenback will have a positive impact on the group’s earnings and vice versa, as the commodity purchases are denominated in U.S. Dollars.

Source: Mplus Research - 21 Aug 2018