Summary

• Teo Seng Capital Bhd’s (Teo Seng) 1QFY21 net loss stood at RM0.8m, vs. a net profit of RM1.9m recorded in the previous corresponding quarter due to lower contribution from the animal health products segment on the back of lower demand, and higher feed production cost, coupled with increased depreciation cost.

• The reported net profit came below our expectation, registering losses in contrast to our previous estimated net profit of RM32.1m. Meanwhile, the reported revenue amounted to 20.5% of our previous revenue forecast of RM562.7m for the year.

• On average, the chicken egg price dropped by 3.8% YoY in 1Q2021 to average of RM0.27 per egg, dragged by lower demand amid Covid-19 pandemic. Despite the weaker ASP of chicken eggs, the group registered flattish revenue YoY in the poultry farming segment. Revenue for the quarter contracted 0.5% YoY to RM115.5m.

• Cost wise, soybean prices maintained its upward momentum in 1Q2021, rising 22.6% QoQ due to climate change and huge import from China. Likewise, the maize price climbed 13.6% QoQ on the back of sharp rise in demand which led to poor availability on the market. Nevertheless, 1QFY21 saw narrowed losses QoQ due to the improved QoQ ASP of chicken eggs (4Q20: 23.0 sen) and the disposal gain on fixed assets, offsetting the higher feed price.

• Considering the reimplementation of Movement Control Order (MCO) following resurgence of Covid-19 daily confirmed cases, coupled with the persistently rising feed commodity prices, the uncertainties in the market may continue to exist over the near term. We reckon the chicken egg prices will linger around RM0.30 per Grade C chicken egg whilst the poultry players’ expansion plans were deferred amid intermittent outbreak of Covid-19 waves could help avoid a potential oversupply.

• In view of the uncertainties in the market amid MCO, Teo Seng has put off some of the projects under their initial expansion plan, targeting production of at least 4.5m chicken eggs per day by end-2022 instead of the earlier expectation of 5.0m (current production at 4.0m chicken eggs per day). However, we reckon the challenging situation to be normalise later in the year when the pandemic is under control following the ongoing vaccination programme.

Valuation & Recommendation

• Considering the deferment of some projects under the expansion plan, we have reduced our FY21f and FY22f forecasted earnings to RM25.5m and 36.3m respectively. We downgrade Teo Seng capital to SELL (from HOLD), with a revised target price of RM0.69. We arrive our target price by ascribing a target PER of 8.0x to its FY21f EPS of 8.7 sen.

• Outlook wise, despite part of its expansion plan was halted due to the pandemic outbreak, the company remained committed in increasing production, targeting to boost its chicken eggs production to 4.5m daily by end-2022. Should the vaccination programme being rolled out smoothly and lead to reopening of business activities, the industry should improve by 2022 in tandem with the company’s expansion plan.

• Risks to our recommendation include low ASP of chicken eggs amid imposition of stricter movement restrictions following renewed spike in Covid-19 cases, 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 May 2021