Company Update

• We met up with Teo Seng Capital Bhd’s (TSCB) management recently on the updates of the group’s current operations and future expansion plans moving into 2019. We are convinced that the group is largely on track to meet its targeted production of 5.0 mln eggs per day, backed by its long term expansion plans that revolve around the layer farming upgrades and expansion and increasing the number of machines used for fertiliser processing from chicken manure.

• As of end October 2018, TSCB is producing up to 3.7 mln eggs per day. We note that 40% of its eggs are exported, mainly to Singapore and Hong Kong, whilst the remainder 60.0% sold locally. Moving forward, TSCB aims to increase its export business as demand from both Singapore and Hong Kong have been fairly resilient over the past few quarters.

• Todate, TSCB has utilised approximately RM40.0 mln as CAPEX for pullet house expansion, enhance biosecurity and automation (automatic chicken manure belt). The implementation of the automated chicken manure belt will improve the group’s efficiency by eliminating the requirement for workers to clear the chicken manure, given the difficulty in finding workers to work in the aforementioned area.

• Meanwhile, the group has re-iterated its commitment to its dividend policy. Historically, TSCB has distributed 25% of its net profit to shareholders in every year, with the exception in 2017. We have imputed a dividend per share of 1.5 sen for 2018, translating to a dividend yield of 1.9%.
  We note that the ASP of chicken eggs have rebounded since July 2018 (3Q2018) to approximately RM0.30 per egg vs. approximately RM0.245 per egg recorded in 2Q2018, implying that the group is largely on track to return to profitability. In the meantime, soybean prices (see Appendix 1) have been fairly soft, declining since peaking in April 2018. Likewise, maize prices (see Appendix 2) have also came off since peaking in May 2018. The soybean and maize price weakness is due to the lingering trade spat between the U.S. and China, coupled with the rising U.S. agricultural stockpiles.
  We also visited TSCB’s paper egg tray manufacturing plant. The aforementioned plant houses two production lines with a combined capacity of up to 103.0 mln paper egg trays per annum (approximately 287,280 paper egg trays per day). Todate approximately 70.0% of the trays produced is consumed internally, whilst the remainder is sold to external parties.
  Moving forward into 2019, TSCB aims to allocate a sizable CAPEX, mainly to cater for layer farming expansion as the group ramps up its production capacity, targeting 5.0 mln eggs by 2022 as well as related business. Although the group has a relatively sizable expansion plan over coming years, the group aims to maintain gearing level at below 1.0x.

Valuation and Recommendation

We continue to like TSCB as one of the largest vertically integrated chicken egg player, having key presence in Malaysia, Singapore and Hong Kong. We reckon that the gradual phasing out of smaller farmers, due to their lack of economics of scale, bodes well for TSCB to capture additional market share and it is likely to reduce the fluctuation of chicken egg prices in the future.

Although its 1H2018 net profit only makes up to 43.5% our of expected net profit of RM14.0 mln in 2018, we believe that TSCB is largely on track to meet our target as the average selling prices of chicken eggs saw a double digit rise in 3Q2018 vis-à-vis 2Q2018.

We made no changes to our earnings forecast, but we upgraded TSCB to BUY (from Hold) with an unchanged target price of RM0.90 as we ascribed an unchanged target PER of 14.0x to its 2019 EPS of 6.4 sen. The ascribed target PER is at a 25.0% discount to its peers average of 18.7x due to its smaller market capitalisation. Following the recent share price weakness, we think valuations are more attractive, trading at prospective PERs of 17.0x and 12.3x in 2018 and 2019 respectively.

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 its feed 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 as 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 - 7 Nov 2018