- We reaffirm BUY on Teo Seng Capital (TSC) but with a lower fair value of RM2.45/share post its weaker-thanexpected 3QFY15 results. Our fair value is based on an unchanged fully-diluted PE of 13x over rolled-forward FY16F earnings.

- TSC’s 9MFY15 results came in below expectations. The group reported a 3QFY15 net profit of RM12mil (QoQ: +65%; YoY: +11%) to bring its 9MFY15 earnings to RM37mil (YoY: +20%). A single-tier interim dividend of 2.5 sen/share was declared.

- In light of this, we have revised downwards our FY15FFY17F earnings forecasts by 19%-24% to reflect its softer margins (-2ppts). Nonetheless, we note that its margins are still superior to that of its peers (EBITDA margin of 19% vs. peers’ average of 15%).

- The negative variance vis-à-vis our forecast can be primarily attributed to lower-than-expected average egg prices for the cumulative nine months (29.5 sen/egg vs our projected 32 sen/egg). Volumes were firm, with the quantity of eggs sold being 11% higher YoY thanks to the addition of its new farm (+400,000 eggs per day) in November last year.

- On a sequential basis, TSC’s earnings had improved as anticipated. Note that a better comparison for its QoQ performance would be its profit before tax (+37%) in view of its abnormally low tax rate (1%) in 3QFY15. We understand that this was due to the availability of a oneoff tax incentive (~RM3.5mil) from its increased exports to Singapore.

- The rebound in TSC’s earnings was in tandem with the recovery of egg prices over the quarter, i.e. from an average of 26 sen/egg in 2QFY15 to 29 sen/egg in 3QFY15 (peak was 34 sen/egg) as well as new capacity from the addition of new houses to its existing farms in July.

- Feed prices have also been on a downward trend. TSC’s corn and soybean input prices were still lower by 12% and 7% QoQ, respectively, after adjusting for the currency impact.

- Looking ahead, we do not expect TSC’s margins to contract further as any price weakness may be offset by energy cost savings from its usage of natural gas (vs. LPG previously) for its egg tray production and upcoming biogas plant-ups (early FY16).

- TSC’s valuations remain compelling. The stock is currently trading at an attractive fully-diluted forward PE of only 10x. This is a 32% discount to the average PE of 14x for the consumer companies under our coverage. Since the order-driven sell-down in August, TSC’s share price has been on an upward trend, rising 43%.

Source: AmeSecurities Research - 17 Nov 2015