Results Highlights

• Teo Seng’s 4Q2018 net profit added 19.3% Y.o.Y to RM17.3 mln, mainly boosted by the sharp increase in the average selling prices (ASP) of chicken eggs, coupled with the lower feed cost. Revenue for the quarter gained 26.3% Y.o.Y to RM147.2 mln. For 2018, cumulative net profit skyrocketed 777.5% Y.o.Y RM30.4 mln. Revenue for the period climbed 16.0% Y.o.Y to RM490.3 mln.

• The reported results came above expectations, making up to 160.7% of our previous net profit estimate of RM18.9 mln. The reported revenue also came above our expectations, amounting to 107.9% of our full-year forecast of RM454.2 mln. The variance in the bottom line was mainly due to the surge in average selling prices of chicken eggs which led to the higher margins.

• Segment wise in 4Q2018, the poultry farming segment’s pretax profit jumped 83.6% Y.o.Y to RM20.56 mln, boosted by improved chicken egg ASPs, higher sales quantity and lower feed cost. The trading segment’s pretax profit improved 74.6 Y.o.Y to RM4.2 mln on higher demand for animal health products.

• As of 4Q2018, Teo Seng’s gearing is reduced to 63.0% (from 67.4% recorded in 3Q2018). 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 long-term expansion plans, targeting production of 5.0 mln eggs per day by 2022. A second interim dividend of 2.5 sen per share, payable on 25th April 2019, was declared.

Prospects

Chicken egg prices trended higher in 4Q2018, (see Appendix 1) as a result of: (i) rising demand for chicken eggs on the back of year-end festive seasons, (ii) rising chicken feed cost as the Ringgit remains downbeat against the Greenback, (iii) decline in Malaysia’s egg supply by approximately 3.0% in December 2018 due to the possible outbreak of avian flu in northern Malaysia, and (iv) closure of smaller farms that were unable to cope with the rising production costs due to the lack of economics of scale.

Teo Seng’s egg production rose to average of approximately 3.9 mln eggs per day in 4Q2018 (from an average of 3.7 mln eggs per day in 3Q2018). This is line with the group’s objective in ramping up its chicken egg production, targeting a daily production of 5.0 mln eggs by end-2022. Moving forward, we reckon that the rally in chicken eggs prices are likely to taper moving into 1H2019 as the recent appreciation of Ringgit will lower imported feed costs.

The group’s major production cost, soybean prices was fairly stable in 4Q2018, averaging at RM36.61 per bushel (+3.7% Q.o.Q) as the trade spat between the U.S. and China remained unabated. Maize prices, however, soared in 4Q2018, averaging at RM737.17 per tonne (+13.5% Q.o.Q) due to infestation of the dreaded pest Fall Army Worm (FAW), coupled with prolonged drought in key producing areas South Africa (see Appendix 2).

Moving forward, we expect soybean prices to remain fairly stable, trading below RM40.00 per bushel, whilst Maize prices are expected to remain on the upper band over the near term, above RM700.00 per metric tonne for the remainder of 2019 as the recent supply shortage remains in play.

Valuation And Recommendation

We continue to like Teo Seng as one of the largest vertically integrated chicken egg player, backed by its gradual production expansion plans. Although, we expect the recent recovery in chicken eggs prices to taper, we expect the pullback to be mild over the foreseeable future as the demand-supply condition remains well-balanced.

With the reported earnings coming above our expectations, we raised our net profit forecast by 23.1% and 19.4% to RM34.3 mln and RM37.7 mln for 2019 and 2020 respectively, reflecting the sharp increase in the ASP of chicken eggs. However, we downgrade Teo Seng to HOLD (from BUY), but with a higher target price of RM1.45 (from RM1.05) as we reckon that current valuations, trading at PERs of 11.5x and 10.5x for 2019 and 2020 respectively are already close to fair after its share price rallied 36.8% year-to-date.

We arrive our target price by ascribing a target PER of 12.5x (unchanged) to its revised 2019 EPS of 11.4 sen. The ascribed target PER remains at a 25.0% discount to its peer average of 16.5x, due to its smaller market capitalisation.

Risks to our recommendation include avian influenza outbreak – 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 - 21 Feb 2019