Summary

• We have corresponded with Teo Seng Capital Bhd (TSCB) management and came away feeling re-assured on the group’s operations and future plans. We understand that TSCB operations during the Movement Control Order (MCO) and Conditional MCO were not affected as chicken eggs are categorised under the essential goods and services.

• The subpar earnings performance in 1HFY20 was largely dragged down by the tepid demand with businesses (hotels, restaurants, malls) closure whilst retail spending shrank at alarming levels. Nevertheless, we see earnings to pick up in 2HFY20 in line with the nation’s economic recovery.

• TSCB currently owns 24 farms (8 pullets and 16 layers) that have the capacity to house 5.5 mln birds. As of end-2019, TSCB is producing up to 4.0 mln eggs per day, gradually rising from 3.0 mln eggs per day since 2015. We note that approximately 40.0% of TSCB eggs are exported overseas.

• Following the implementation of MCO, TSCB’s interim layer farming expansion will now be delayed by additional 6 months. While daily egg production is expected to come at 4.1m eggs by end-2020 (vs our initial projection of 4.3m eggs), the longer term projection of 5.0m eggs per day by end-2022 remain in place.

• Moving forward, TSCB aims to ramp-up their promotional activities in order to maintain and increase their market share. At the same time, TSCB is strengthening their downstream business by introducing new products such as hard-boiled eggs, soft-boiled eggs and herbal eggs in order to diversify their products base.

• Meanwhile, the group has re-iterated its commitment to its dividend distribution and while TSCB does not adopt a formal dividend policy, the group has distributed 20%- 50% of its net profit to shareholders every year, with the exception in 2017. We have imputed a dividend per share of 2.0-3.0 sen for FY20f-FY21f, translating to a decent dividend yield of 2.5%-3.8%.

Valuation & Recommendation

• We made no changes to our earnings forecast given that the group’s long term expansion of targeting 5.0m daily egg production by end-2022 remain on track. At the same time, we reckon that, eggs prices should stabilise premised to the improved retail spending across majority of the ASEAN countries which TSCB has business exposure.

• Consequently, we maintained our HOLD recommendation on Teo Seng Capital 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.

• 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 - 6 Oct 2020