Summary

• Teo Seng Capital Bhd’s (Teo Seng) 2QFY20 net profit fell 37.4% YoY to RM3.2m, dragged by the weakness in the poultry farming segment due to decline in average selling price (ASP) of chicken eggs, coupled with decrease in sales quantities of eggs. Revenue for the quarter decreased 0.4% YoY to RM120.8m.

• For 1HFY20, cumulative net profit sank 81.3% YoY to RM5.1m. Revenue for the period contracted 12.9% YoY to RM236.7m. The reported net profit came in at 34.9% of our estimated net profit of RM14.6m. Meanwhile, the reported revenue amounted to 48.6% of our revenue forecast of RM486.9m.

• We gather that the downturn in ASP of chicken eggs in 1Q2020 appears to have found its footing with Grade C chicken eggs prices rising 17.2% QoQ in 2Q2020 to average of RM0.33 per egg in June. The recovery was stemmed by the pickup in retail segment that has been relatively robust given that eggs are one of the fastest moving consumer goods off supermarket shelves. At the same time, the gradual re opening of economic activities has also spurred the recovery in demand.

• Cost wise, soybean prices edged lower in 2Q2020, falling -4.4% QoQ owing to the Covid-19 pandemic that affected business activities across the globe. Likewise, maize prices was softer, declining -4.1% QoQ, reflecting the dour demand. The lower feed prices will stabilise margins from the volatility of chicken eggs prices.

• Moving forward, we think that chicken eggs prices will linger around RM0.30 per Grade C chicken egg as on stable demand whilst poultry players’ expansion plans were temporary halted on the implementation of Movement Control Order will keep any potential oversupply condition at bay.

• Teo Seng remains committed on their expansion plan, targeting production of 5.0m chicken eggs per day by end-2022 (current production at 4.0m chicken eggs per day). An additional 0.5m eggs per day will come into play upon the completion of new layer farm by 1H2021. At the same time, the new central packaging system that was recently completed in 2Q2020 will boost production efficiency.

Valuation & Recommendation

• We deem the reported earnings to be in line with our expectations on the account that margins will improve in subsequent quarters on the higher ASP of chicken eggs as demands improved. Following the recent retracement in share price, we think that valuations have now turned fair. Consequently, we upgrade Teo Seng Capital to HOLD (from SELL) with an unchanged target price of RM0.87. We arrive our target price by ascribing a target PER of 8.0x to its FY21f EPS of 10.8 sen.
• We continue to like Teo Seng as one of the largest local vertically integrated poultry player. We remain sanguine on the group’s expansion plans, targeting production of 5.0m eggs per day by end-2022. The increase in production will be accompanied by improved production efficiency enables Teo Seng to benefit from economies of scale over the long run.
• Risks to our recommendation include avian influenza outbreak that may dampen demand. Higher chicken feed (mainly soybean and maize), which makes up 70% of its feed cost will negatively impact its margins and vice versa. A firmer ringgit against the USD may impact margins as the purchases are denominated in USD.

Source: Mplus Research - 13 Aug 2020