Results Highlights

• Teo Seng’s 2Q2019 net profit stood at RM5.1 mln vs. a net loss of RM0.5 mln recorded in the previous corresponding quarter, lifted by higher production and sale of chicken eggs that offset the lower average selling prices (ASP) of chicken eggs. Revenue for the quarter climbed 18.0% Y.o.Y to RM121.2 mln.

• For 1H2019, cumulative net profit surged 346.8% Y.o.Y to RM27.2 mln. Revenue for the period climbed 24.8% Y.o.Y to RM271.8 mln. However, the reported results came below our expectations, making up to 43.7% of our previous net profit estimate of RM62.2 mln. The reported revenue also came in slightly below our expectations, amounting to 47.8% of our full-year forecast of RM568.1 mln. The variance in the bottom line is mainly due to the steeper-than-expected decline in average selling prices of chicken eggs.

• Segment wise in 2Q2019, the poultry farming segment’s pretax profit stood at RM3.8 mln vs. a pretax loss of RM3.0 mln recorded in 2Q2018, boosted by improved chicken egg ASPs and higher sales quantities. The trading segment’s pretax profit grew 12.1% Y.o.Y to RM2.6 mln on improved topline growth.

• As of 2Q2019, Teo Seng’s gearing is reduced to 58.0% (from 59.4% recorded in 1Q2019). 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.

Prospects

After a sharp rally in 1Q2019, chicken egg prices has tapered moving into 2Q2019 (see Appendix 1) mainly due to: (i) conclusion of festive seasons, (ii) poultry players ramping up production in 1Q2019 to capitalise on the higher chicken eggs prices, and (iii) normalised demand-supply condition. Teo Seng’s egg production rose to approximately 4.0 mln eggs per day in 2Q2019 (from 3.9 mln eggs per day in 1Q2019) as the group is on track to meet its target daily production of 5.0 mln eggs by end-2022. Moving forward, we reckon that chicken eggs prices will remain fairly stable at current levels.

The group’s major production cost, soybean prices retreated before recovering moving into the end of 2Q2019, averaging at RM36.24 per bushel (-1.2% Q.o.Q), dragged down by the escalating trade dispute between the U.S. and China. Maize prices, however, rose to an average RM815.59 per tonne (+3.1% Q.o.Q) as the peak lean season period on the arrival of green and main harvest in South Africa continent (see Appendix 2).

Moving forward, Teo Seng aims to grow their own brand’s premium egg – Omega Lutein, which is touted to be more nutritious and eyesight enhancing. The group will also continuously explore new customer base to enhance trade activities and further grow its footprint in the export market.

Valuation And Recommendation

Despite the weaker-than-expected results, we continue to like Teo Seng as it is one of the largest vertically integrated chicken egg player, backed by its gradual production expansion plans.

With the reported earnings coming below our expectations, however, we trim our net profit forecast by 34.1% and 34.3% to RM41.0 mln and RM45.2 mln for 2019 and 2020 respectively, reflecting the decline in the ASPs of chicken eggs. We maintain our BUY recommendation on Teo Seng, but with a lower target price of RM1.20 (from RM1.65). We arrive our target price by ascribing a lower target PER of 8.0x (from 10.5x) to its revised 2020 EPS of 15.1 sen. The downward revision of the target PER is in line with the decline across its peer’s valuations, which is at a 25% discount to its peers average valuation of 10.7x.

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 - 19 Aug 2019