Summary

• Teo Seng Capital Bhd’s (Teo Seng) 3QFY20 net profit fell 93.1% YoY to RM1.2m, 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 11.1% YoY to RM123.0m.
• For 9MFY20, cumulative net profit sank 86.0% YoY to RM6.3m. Revenue for the period contracted 12.3% YoY to RM359.8m. The reported net profit came in at 43.2% of our estimated net profit of RM14.6m. Meanwhile, the reported revenue amounted to 73.9% of our revenue forecast of RM486.9m.
• Following the previous quarter upswing in chicken egg prices, the ASP of chicken eggs began to show a downward trend, dropped by 21.8% QoQ in 3Q2020 to average of RM0.23 per egg in September. The decline was dragged by lower consumer demand due to shrinking economic activities amid second wave of Covid19 pandemic. The downturn in ASP of chicken eggs has been a drag on the company’s top-line growth, albeit the growth in sales quantities of eggs QoQ and stable contribution from the animal health products segment.
• Cost wise, soybean prices moved higher in 3Q2020, climbing +8.4% QoQ owing to the brisk export demand coupled with dry weather conditions in the US Midwest. Likewise, maize prices were up, rising +6.6% QoQ, reflecting the increased demand. The higher feed prices will translate to lower margins for the poultry players.
• Until the economic activities are spurred by the ending of Conditional Movement Control Order phase for most of the states in December, we reckon that chicken eggs prices will linger around RM0.25 per Grade C chicken egg as on lower demand whilst poultry players’ expansion plans were temporary halted on the implementation of Conditional 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 uncertainty market condition may continue to weigh on the chicken eggs prices over the near term.

Valuation & Recommendation

• We reckon that the ASP of chicken eggs will continue to be dragged by lower consumer demand amid Covid-19 pandemic until further relaxing on the CMCO rules. Our FY20f earnings forecast for Teo Seng is thus lowered considering the impact of lower ASP of chicken eggs on the company’s top-line. We maintain our HOLD recommendation on Teo Seng, with an unchanged target price of RM0.87. Our target price is based on PE of 8.0x pegged to our FY21f EPS of 10.8 sen.
• We continue to like Teo Seng as one of the largest local vertically integrated poultry players, and its established presence in Hong Kong and Singapore market. We remain optimistic on its expansion plan to increase its chicken eggs production to 5.0m daily by end-2022, riding on the growing consumer demand for chicken eggs while improving its production efficiency.
• Risks to our recommendation include low ASP of chicken eggs owing to market uncertainties, as well as higher chicken feed costs (mainly soybean and maize) due to growing global export demand, which may eventually lower its margin.

Source: Mplus Research - 18 Nov 2020