- We reaffirm our BUY rating on Teo Seng Capital (TSC) with an unchanged fair value of RM2.70/share. This is based on an unchanged fully-diluted FY15F PE of 13x.

- TSC reported revenue of RM112.6mil and net profit of RM17.4mil for its 1QFY15. The results met 25% of our full-year FY15F earnings estimate of RM70mil.

- The group’s 1QFY15 earnings had surged by a commendable 70% YoY on the back of a 30% rise in revenue. The improved performance can be mainly attributed to the availability of new production capacity following the addition of a new farm (~400,000 eggs/day) at end-FY14 as well as higher egg selling prices.

- Sequentially, TSC’s net profit had slipped by 3% although its revenue had increased by 4% (in tandem with the higher sales volume and stable ASP). We are however, not too concerned as the decline was mainly due to 1QFY15’s higher tax rate. As it is, TSC’s PBT was higher by 8% QoQ.

- As usual, no dividends were announced this quarter. At the current price, our FY15F-FY17F gross DPS forecasts (based on payout ratios of 25%-35%) translate into attractive yields of 3% to 5%.

- Looking ahead, we expect TSC to register sequentially softer earnings in 2QFY15 due to the seasonality effect and to a smaller extent, the impact of GST on overall consumer sentiment. That said, we are confident of its earnings picking up in 2HFY15 (as per its historical trend) in view of strong demand during the festive periods (e.g. Hari Raya and Deepavali) and addition of a new farm.

- We also expect the group’s EBITDA margins to continue expanding (QoQ: +1ppts; YoY: +5ppts), buoyed in part by the soft commodity prices. According to the USDA, ending global inventory of soybean is forecast to rise by 12.5% from 2014/2015F to 2015F/2016F, underpinned by higher carry-over inventory from the US and Brazil while that of corn is set to grow by 11%.

- Additionally, the group is set to reap potential savings from its various cost management activities beginning FY15F. We understand that its biogas plant-ups are progressing well, with the first (of five) plant on schedule for completion this year (savings of up to RM2mil p.a.). The construction of its new feedmill plant and installation of new paper tray machine are also going on as planned.

- We are leaving our FY15F-FY17F earnings estimates unchanged for now. Valuation-wise, the stock is presently trading at an undemanding fully-diluted forward PE of only 9x - half the sector’s average of 18x.

Source: AmeSecurities Research - 19 May 2015