Summary

• Teo Seng Capital Bhd’s (TEOSENG) booked core net profit of RM4.1m in 1Q22 against core net losses of -RM1.4m in 1Q21. QoQ, however, TEOSENG’s core net profit declined 65.9% to RM4.1m. The results came in below expectations and it missed our full year consensus of RM39.8m. Key deviations were mainly due to the significant margin-hit arising from the higher-than-expected chicken feed cost.

• TEOSENG reported a turnaround YoY, mainly boosted by higher contribution from the poultry farming segment on the back of improved ASP of eggs along with the increased market demand. QoQ, however, the lower sales quantity of eggs coupled with the higher production costs have dragged the group’s net profit lower by 65.9%.

• On average, the chicken egg price increased by 29.2% YoY in 1Q22 to average of RM0.35 per egg as the soaring chicken feed cost was passed to end consumers amid rising demand in the market. The increase in chicken egg prices has translated to higher revenue YoY for TEOSENG in the poultry farming segment.

• Cost wise, soybean prices continued to surge in 1Q22, rising 24.3% QoQ as Russia Ukraine tensions exacerbated supply risks on global supplies. Likewise, the maize price soared 34.6% QoQ due to concerns over crop conditions in Argentina and Brazil amid prolonged dry spells, as well as the suspension of maize export from Ukraine. The rise in feed price that outpaced the marginal increase in chicken egg price has hit the group’s margins.

• Moving forward, we think that the chicken eggs prices will linger around RM0.35 per Grade C chicken egg as ceiling prices will be enforced on chicken eggs under the government’s price control scheme until 5th June 2022.

• TEOSENG intends to expand its downstream business by offering a range of pasteurised processed egg products. Meanwhile, the group remained committed to increase its daily chicken eggs production to 4.25m and 4.50m in FY22 and FY23 respectively, by improving the utilisation rate of production line and resuming its expansion plan.

Valuation & Recommendation

• As a fully integrated poultry farming company, TEOSENG enjoys economies of scale which enable the group to meet the rising demand for chicken eggs amid business resumption and gain market share from the local farmers. Nevertheless, we foresee the uncertainty over commodity prices which may prevail over FY22 on the back of inflation as well as the unresolved Russia-Ukraine tensions to post challenge to the group.

• Consequently, we slashed our FY22f forecasted earnings by 41.5% to RM23.3m. The FY23f earnings is projected at RM36.1m. We downgrade TEOSENG to SELL (from BUY) with a revised target price of RM0.63. The target price is derived from ascribing a target PER of 8.0x to its FY22f EPS of 7.9 sen.

• Risks to our recommendation include the elevated commodity prices of maize and soybean which may continue to hamper the group’s margin. Another business risk for TEOSENG is the risk associated with the outbreak of poultry diseases which may impact the group’s productivity.

Source: Mplus Research - 13 May 2022