Results Highlights

• Teo Seng’s 3Q2018 net profit surged 521.4% Y.o.Y to RM7.0 mln, mainly boosted by the recovery in the average selling prices (ASP) of chicken eggs, coupled with the lower feed cost. Revenue for the quarter rose 14.6% Y.o.Y to RM125.3 mln. For 9M2018, cumulative net profit stood at RM13.2 mln vs. a net loss of RM11.0 mln recorded in the previous corresponding period. Revenue for the period gained 12.1% Y.o.Y to RM343.1 mln.

• The reported results came above expectations, making up to 93.8% of our previous estimated net profit estimate of RM14.0 mln. However, the reported revenue came slightly below our expectations, amounting to 71.5% of our full-year forecast of RM479.7 mln.

• Segment wise in 3Q2018, the poultry farming segment’s pretax profit stood at RM6.7 mln vs. a pretax loss of RM0.1 mln, lifted by improved egg ASPs, higher sales quantity and lower feed cost. The trading segment’s pretax profit rose 68.6% Y.o.Y to RM1.9 mln on higher demand for animal health products.

• As of 3Q2018, Teo Seng’s gearing is reduced to 67.4% (from 68.0% recorded in 2Q2018). Moving forward, we expect Teo Seng’s gearing level to remain above the 50.0% level as the group continues to hinge on external funding for its expansion plans, targeting production of 5.0 mln eggs per day in 2022.

Prospects

Teo Seng’s egg production stood at 3.7 mln eggs per day in 9M2018 (relatively unchanged from end-2017). Despite that, we note that the group has already mapped its plan to expand its layer farming production, targeting a daily production of 5.0 mln eggs by end-2022. Chicken egg prices have rebounded moving into 3Q2018, (see Appendix 1) as poultry players opt to cull their livestock earlier to curtail the oversupply of chicken eggs. Moving forward, we expect chicken prices to remain fairly stable towards end-2018 as the demand-supply condition remains well balanced.

The group’s major production cost, soybean prices remained pressured in 3Q2018, averaging at RM35.30 per bushel (-8.6% Q.o.Q) as the trade spat between the U.S. and China remain unabated. In the meantime, the prospect of declining imports from China, coupled with the absence of abnormal weather phenomenon, would likely cap the recovery in soybean oil prices over the foreseeable future. Meanwhile, Maize prices remained stable, jumping in July 2018 before tapering off in the subsequent two months, averaging at RM873.39 per tonne (+8.6% 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 stable, above RM800.00 per metric tonne for the remainder of 2018 on improved demand for livestock feed and industrial processing.

Valuation And Recommendation

We continue to like Teo Seng as one of the largest vertically integrated chicken egg player, having key presence in Malaysia, Singapore and Hong Kong. We believe that the recent recovery in chicken eggs prices will be sustainable over the foreseeable future, backed by the well balanced demand-supply condition.

With the reported earnings coming above our expectations, we raised our net profit forecast by 36.6% and 15.5% to RM19.1 mln and RM22.4 mln for 2018 and 2019 respectively, reflecting the rebound in the ASP of chicken eggs. Consequently, we maintain our BUY recommendation Teo Seng with a higher target price of RM1.05 (from RM0.90). We ascribed a target PER of 14.0x (unchanged) to its revised 2019 EPS of 7.4 sen. The ascribed target PER remains at a 25.0% discount to its peer average of 18.7x, due to its smaller market capitalisation.

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. 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 - 14 Nov 2018