Company Update

• Teo Seng Capital Bhd (TSCB) has signed a Memorandum of Agreement (MoA) with Solarvest Holdings Berhad to install solar PV panel across TSCB’s chicken farms and factories located in the state of Johor, Malaysia. TSCB has earmarked a capital expenditure of approximately RM13.0 mln for installing of about 4,000 kWp (kilowattpeak) rooftop solar projects.

• We reckon that the move bodes well for TSCB as it could potentially result in costing saving of approximately 1%-2% per annum in operational expenses over the long run. In the meantime, the move is also in line with the government’s initiative to encourage the adoption of green energy, outlined in Budget 2020.

• The investment will be funded by internal fund. As of 3Q2019, TSCB’s cash & bank balances stood at RM41.7 mln. In the meantime, 50.0 mln of warrants will be expiring at end-January 2020. Should all warrants be exercised, this will give a raise of another RM67.5 mln boost to TSCB’s war chest. Hence, we do not see any funding issue for the aforementioned investment.

• We also note that TSCB has completed the acquisition of Professional Vet Enterprise Sdn Bhd for RM1.8 mln towards end-3Q2019. The acquisition marks TSCB’s successful penetration of animal healthcare products into East Malaysia. Although the move may generate higher income for the trading segment, we believe that the poultry farming business which constitutes to 88.3% of total revenue in 9M2019 will continue to anchor TSCB’s total revenue, moving forward.
  
  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 recent recovery in chicken eggs prices may be sustainable, premised to the rising demand. Budget 2020 announcement that announced slew of subsidies also bodes well to improve the spending power amongst consumers and corresponding demand for its eggs.

As the agreement has yet to take effect until the completion over the next 12 months, we made no changes to our earnings forecast for now. We maintain our BUY recommendation on TSCB with an unchanged target price of RM1.65. We arrive our target price by ascribing an unchanged target PER of 8.0x to its 2020 EPS of 20.6 sen. The ascribed target PER is at a 25% discount to its peers average valuation of 10.7x, due to TSCB’s smaller market capitalisation against poultry giants like Leong Hup International Bhd and QL Resources Bhd.

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 - 22 Nov 2019