Summary

• Teo Seng Capital Bhd’s (TEOSENG) registered core net profit of RM3.8m in 2Q22 against core net losses of –RM14.8m in 2Q21, bringing the 6M22 core net profit to RM7.9m vs. -RM16.2M in 6M21. The results, however, came in below expectations, amounting to 33.9% of our full year forecast of RM23.3m. Key deviations were mainly due to the losses made in poultry farming segment that was resulted from a lower-than-expected margin.

• YoY, the turnaround was largely due to the narrowed losses in the poultry farming segment resulting from the improved eggs’ selling price, which has contributed to top line growth. QoQ, however, its core net profit dropped 6.5% to RM3.8m despite a higher revenue, mainly due to the higher production cost in the poultry farming segment.

• On average, the Grade C chicken egg price increased by 41.7% YoY in 2Q22 to average of RM0.35 per, enabling egg producers to pass partial soaring chicken feed costs to end consumers. While such increase has translated to a higher revenue YoY for TEOSENG’s poultry farming segment, the segment still record losses as the increase was capped under Government’s price control scheme.

• Cost wise, both soybean and maize prices continued its uptrend move QoQ, driven by the supply disruptions arising from Russia-Ukraine conflict, global fertiliser price hike as well as increased freight cost. The continued elevated feed price, coupled with the price control scheme have hit TEOSENG’s margin despite the cushion of egg subsidy from the government.

• Moving forward, we think that the chicken eggs prices will linger around RM0.37 per Grade C chicken egg as higher ceiling prices was implemented under the government’s price control scheme effective from 1st July 2022.

• TEOSENG’s expansion plan to boost its daily chicken eggs production to 4.25m and 4.50m in FY22 and FY23 respectively is on schedule, including modification of existing chicken houses as well as expansion on the layer farming capacity. Meanwhile, the group strives to grow the trading of animal health products which is less impacted by the commodity prices.

Valuation & Recommendation

• As business activities continues its progressive recovery, we believe the demand for eggs will remain resilient in both the domestic and overseas markets. Nevertheless, challenges remained in the industry with the chicken feed price staying elevated, as well as the implementation of price control scheme. Although the commodity prices are declining and expect to move lower towards end-2022, we remain cautious on the company’s outlook given the margins are sensitive towards any spike in its feed costs.

• Consequently, we slashed our FY22f and FY23f forecasted earnings by 15.5% and 16.3% to RM19.7m and RM30.2m respectively. However, we upgrade TEOSENG to HOLD (from SELL) with a revised target price of RM0.82 as we rolled over to FY23f earnings. The target price is derived from ascribing a target PER of 8.0x to its FY23f EPS of 10.3 sen.

• Risks to our recommendation include the elevated commodity prices of maize and soybean amid the prolonged conflicts between Russia and Ukraine. Any further disruption in supply may increase TEOSENG’s production cost and cap its margin. Besides, the group is exposed to the risk associated with the outbreak of poultry diseases.

Source: Mplus Research - 17 Aug 2022