Summary

• Teo Seng Capital Bhd’s (Teo Seng) 3Q21 net profit surged 90.7% YoY to RM2.3m, narrowing it’s 9M21 core net loss to -RM13.9m (vs. core net profit of RM6.2m registered for 9M20). Note that the 9M21 core net loss was arrived after adjusting for exceptional gains of disposal of PPE and right-of-use assets of RM1.9m and RM3.0m, respectively in 1H21. Nevertheless, the results came in above our full year consensus of -RM23.6m, mainly due to the higher-than-expected contributions from both poultry farming and investment and trading segment under the current quarter.

• YoY, Teo Seng’s core net profit jumped 90.7% to RM2.3m, underpinned by (i) higher revenue from the poultry segment arising from the improved ASP of chicken eggs and increased demand amid reopening of economic activities, and (ii) sustainable contribution by the animal health products division under trading segment. QoQ, Teo Seng turned core net losses of -RM14.8m in 2Q21 into core net profit of RM2.3m in 3Q21 as the rebound selling price of eggs surpassed the impact of higher feed cost.

• On average, the chicken egg price rose by 32.4% YoY in 3Q2021 to average of RM0.35 per egg due to recovery in economic activities amid gradual lifting of lockdowns in the country. The stronger ASP above RM0.30 throughout 3Q21 has contributed to the increase in revenue YoY for the poultry farming segment.

• Cost wise, soybean prices have been plummeting since May 2021, dropping -9.3% QoQ in 3Q21 amid higher supply and softer Chinese demand. Meanwhile, the maize prices rose 1.7% QoQ which was fairly stable as compared to the previous quarter. The improved commodities market conditions lifted the group’s margin.

Outlook

• Moving forward, we think that chicken eggs prices will continue to linger around RM0.35 per Grade C chicken egg amid business reopening as above 95% of adult population is fully vaccinated. Do note that Grade C chicken eggs prices remained stable at RM0.34 per egg on average in mid-October 2021.

• During the country’s transition from Covid-19 pandemic to endemic stage, Teo Seng will continue focusing on production efficiency and cost effectiveness while widening its customer base through e-commerce. Meanwhile, the production target will be maintained at 4.4m chicken eggs per day by end-2022 should the company keep its expansion plan on schedule.

Valuation & Recommendation

• We reckon the improving demand and ASP for chicken eggs amid the domestic economic recovery bode well for Teo Seng Capital. Despite challenging environment due to elevated commodity prices of maize and soybean, we believe the poultry industry should normalise towards FY22. Consequently, we revised our FY21f forecasted net loss of to -RM7.1m and increased the FY22f earnings by 4.7% to RM26.6m.

• We maintained our HOLD recommendation on Teo Seng Capital with a revised target price of RM0.73 after rolling over our valuation metrics to FY22f. The target price is arrived by ascribing a target PER of 8.0x to its FY22f EPS of 9.1 sen.

• Risks to our recommendation include the uncertainty market conditions such as fluctuation of chicken egg demand and supply condition, as well as the elevated chicken feed costs (mainly soybean and maize) which may eventually lower its margin. A weaker ringgit against the USD may also impact margins as the purchases are denominated in USD.

Source: Mplus Research - 17 Nov 2021