Summary

• Teo Seng registered core net loss of -RM14.8m in 2Q21 (vs. RM3.1m core net profit in 2Q20 and core net loss of –RM1.4m in 1Q21), bringing FY21 core net loss to – RM16.2m (vs. core net profit of RM5.0m in 1H20). 1H21 core net loss was reached after adjusting for exceptional gains of disposal of PPE and right-of-use assets of RM1.9m and RM3.0m, respectively. The results came in below expectations and it missed our full year consensus of RM25.5m. Key deviations were mainly due to (i) lower contribution from the poultry segment arising from lower ASP of chicken eggs and (ii) higher-than-expected feed production cost.

• YoY, Teo Seng 2Q21 core net loss stood at -RM14.8m, vs. a net profit of RM3.1m recorded in the previous corresponding quarter due to lower contribution from the poultry segment, driven by softer market price of chicken eggs arising from lower demand of eggs in local market, as well as higher feed costs. QoQ, net loss widened (vs. –RM1.4m in 1Q21) despite higher sales quantity of eggs, mainly due to higher feed cost.

• On average, the chicken egg price dropped by -26.0% YoY in 2Q2021 to average of RM0.25 per egg, dragged by lower demand of eggs from the local market amid Covid-19 pandemic. The weaker ASP of chicken eggs has led to a slight decrease in revenue YoY in the poultry farming segment.

• Cost wise, soybean prices continued to soar in 2Q21, rising 7.6% QoQ on prospects of tighter market conditions amid renewed foreign demand. Likewise, the maize price climbed 10.3% QoQ due to supply concerns over unfavourable weather as well as heightened export demand. The higher feed price, coupled with the suppressed chicken eggs prices has hit the group’s margins.

• Moving forward, we think that chicken eggs prices will linger around RM0.35 per Grade C chicken egg amid gradual reopening of economic activities along with the improved vaccination rate in Malaysia. Note that averaged Grade C chicken eggs prices saw an improvement in July 2021, recording at RM0.35 per egg.

• Teo Seng has continued halting part of its projects under the initial expansion plan due to the implementation of restriction measures by the government to combat Covid-19 pandemic. Thus, production target has been further revised to at least 4.4m chicken eggs per day by end-2022 instead of the earlier expectation of 4.5m (current production at 4.0m chicken eggs per day).

Valuation & Recommendation

• We reckon that the weakness may prolong despite gradual reopening of economic activities as feed prices remain elevated. Consequently, we slashed our FY21f forecasted earnings to net loss of -RM23.6m and FY22f earnings by 30.0% to 25.4m. Nevertheless, we upgrade Teo Seng Capital to HOLD (from SELL) with a target price of RM0.69 as we are rolling forward to the FY22f earnings. The target price is arrived by ascribing a target PER of 8.0x to its FY22f EPS of 8.7 sen.

• Outlook wise, the gradual resume of various economic sectors is expected to stimulate egg consumption and improve the averaged egg price in 2H21, in line with the group’s expansion plan. The whole industry is expected to normalise when the commodity prices of maize and soybean normalise gradually towards FY22.

• Risks to our recommendation include steep rise in chicken feed costs (mainly soybean and maize) due to growing global export demand, which may eventually lower its margin. A weaker ringgit against the USD may impact margins as the purchases are denominated in USD.

Source: Mplus Research - 18 Aug 2021