Summary

• Teo Seng Capital Bhd’s (TEOSENG) 1Q23 core net profit jumped 378.1% YoY to RM19.5m. The results came in above expectations, amounting to 79.9% of our previous full year forecast at RM24.4m. Key deviations were mainly due to the higher-than-expected chicken eggs prices and sales volume. Meanwhile, the first interim dividend of 2.0 sen per share, payable on 28th June 2023 was declared.

• YoY, TEOSENG’s core net profit witnessed a remarkable jump of >100%, attributed to (i) higher contribution from the poultry farming segment on the back of improved selling prices and sales quantities of eggs as well as higher sales of old hens, (ii) government’s grant which has cushioned the impact of continued high feed cost, and (iii) stable demand and contribution from investment and trading division.

• On average, the chicken egg price rose 3.5% YoY and QoQ, surpassing RM0.36 per Grade C chicken egg, which has translated into higher revenue for the poultry farming segment. The upward trend in chicken egg prices continued, reaching RM0.38 per Grade C chicken egg by the end of March 2023.

• In the near term, we think that the price of Grade C chicken egg will sustain around RM0.38 as egg prices are subject to ceiling price control. However, should the ceiling prices be uplifted, we may observe gradual improvement in chicken egg prices towards RM0.45, considering the persistently high feed costs

• Production wise, daily chicken eggs production exceeded 4.0m following the capacity expansion and upgrading of existing farm facilities and equipment in 4Q22. TEOSENG remained committed to its expansion plan, aiming to reach a daily chicken egg production of 4.3m eggs by FY24.

• To address the ongoing challenges of high raw material costs, TEOSENG has taken proactive measures by (i) expanding the customer base through e-commerce and other diverse marketing channels as well as new downstream products, and (ii) commissioning 16 solar PV systems, resulted in a 30.0% reduction in electricity cost. Meanwhile, the group has 10 additional solar PV projects in progress for installation which may lead to further reduction in electricity cost.

Valuation & Recommendation

• TEOSENG’s outlook turned brighter amid improving demand for chicken eggs in both domestic and overseas market during economic recovery. Meanwhile, we foresee a higher contribution from the poultry farming segment in anticipation of the floated chicken egg prices.

• Consequently, we increased our FY23f and FY24f forecasted earnings by 101.6% and 111.4% to RM49.2m and RM57.7m respectively. We upgrade TEOSENG to BUY (from SELL) with a revised target price of RM1.34. The target price is derived from ascribing a target PER of 8.0x to its FY23f EPS of 16.8 sen.

• Risks to our recommendation include the possible continuation chicken egg price control which may poses a limitation on the group’s upside potential. Besides, the group is vulnerable to uncertainties surrounding global supply of soybean and maize. Any adverse weather conditions leading to reduced harvests could trigger higher commodity price, ultimately exerting pressure on the group’s margin.

Source: Mplus Research - 16 May 2023