Summary

• Teo Seng Capital Bhd’s (TEOSENG) 3Q22 core net profit plunged 80.8% YoY to RM0.4m despite higher revenue reported in the quarter, making up for 9M22 net profit of RM8.3m (vs. -RM13.9m for 9M21). The results came in below expectations, amounting to 42.2% of our full year forecast at RM19.7m. Key deviations were mainly due to higher-than-expected deferred taxation recognised in 3Q22.

• TEOSENG registered growth in its revenue for both YoY and QoQ, but higher-than expected effective tax rate in 3Q22 weighed on the bottom line. YoY, TEOSENG’s top line improved 15.3% to RM166.6m, driven by improved selling price of eggs coupled with the egg subsidy received from the government, as well as the growth of the trading of animal health products division. QoQ, TEOSENG booked a 5.8% growth in revenue, contributed by the increase in sales quantity of eggs in domestic market, improved egg selling price and sales of spent hen.

• On average, the chicken egg price climbed 5.8% YoY in 3Q22 to RM0.37 per Grade C chicken egg, in pace with higher feed cost. The higher egg price has translated to higher revenue YoY for the poultry farming segment, leading to a 53.4% improvement in profit before tax for the segment after government’s subsidies.

• Cost wise, soybean meal price rose 17.4% YoY to USD469.0/MT, while maize price climbed 12.0% YoY to USD260.1/MT on the back of ongoing global supply concern. Although both soybean meal and maize futures saw mild decline QoQ owing to softer demand and imports from China, we believe the feed price should remain at a high level over the near term due to uncertainties over the supply situation.

• Moving forward, we think that the price of Grade C chicken egg will linger around RM0.37 until the removal of ceiling price by the government. The group may continue to face challenges arising from the price ceiling and elevated feed cost.

• TEOSENG’s remained committed to its plan to modify existing chicken houses and expand its layer farming capacity, targeting to boost its daily chicken eggs production to 4.50m in FY24. Meanwhile, the group will continue focusing on the trading of animal health products division which is less impacted by the commodity prices as cost pressure persisted

Valuation & Recommendation

• The poultry industry witnessed continuous increase in demand for eggs in the domestic and overseas market amid economic recovery. However, the elevated feed price could continue to hit TEOSENG’s margin with egg being placed under price control scheme. Hence, we remained cautious on the industry’s outlook until both the price and feed costs normalise.

• Consequently, we slashed our FY22f and FY23f forecasted earnings by 41.1% and 35.8% to RM11.6m and RM19.4m respectively. We downgrade TEOSENG to SELL (from HOLD) with a revised target price of RM0.53. The target price is derived from ascribing a target PER of 8.0x to its FY23f EPS of 6.6 sen.

• Risks to our recommendation include the elevated commodity prices of maize and soybean amid uncertainties over global supply. Any unfavorable weather conditions that result in lower harvest could increase commodity price and hit the group’s margin. Besides, the group is exposed to the risk associated with the outbreak of poultry diseases.

Source: Mplus Research - 16 Nov 2022