Summary

• Teo Seng Capital Bhd’s (Teo Seng) 4QFY20 net loss stood at RM2.1m, vs. a net profit of RM13.6m recorded in the previous corresponding quarter, dragged by the weakness in the poultry farming segment due to depressed average selling price (ASP) of chicken eggs, coupled with decrease in sales quantities of eggs. Revenue for the quarter decreased 13.1% YoY to RM118.5m.

• For FY20, cumulative net profit sank 92.9% YoY to RM4.2m. Revenue for the period contracted 12.5% YoY to RM478.3m. The reported net profit came in at 42.8% of our estimated net profit of RM9.8m. Meanwhile, the reported revenue amounted to 98.2% of our revenue forecast of RM487.0m.

• On average, the chicken egg ASP dropped by 4.1% QoQ in 4Q2020 to average of RM0.25 per egg attributed to lower consumer demand due to shrinking economic activities amid rising Covid-19 cases. The downturn in ASP, coupled with slightly lower sales quantities of eggs have been a drag to the company’s top-line growth. However, the ASP of chicken eggs began to show an upward trend towards the end of the quarter to average of RM0.28 in December 2020.

• Cost wise, soybean prices moved higher in 4Q2020, climbing +21.4% QoQ owing to tightening global supplies and large purchases by China. Likewise, maize scarcity forced the prices to rise +10.1% QoQ. The higher feed prices will translate to higher input costs and lower margins for the poultry players.

• We reckon that chicken eggs prices will linger around RM0.30 per Grade C chicken egg as on increasing demand as more business activities are allowed following the reducing number in Covid-19 cases. Meanwhile, poultry players will continue their expansion plans once the MCO is lifted.

• 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 begin to rise over the near term as further relaxing on MCO that could boost consumer demand. With consumer sentiment remains low over the near term, we have reduced our FY21f forecasted earnings to RM32.1m. 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 10.9 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. Meanwhile, the economic reopening over the near term should shine a light on poultry industry.

• 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 - 10 Feb 2021