· A steady growth poultry stock. Leaving behind two quarters of losses since FY12, PW Consolidated Bhd (PW) has been registering fairly good results with improved profit margins. PW which is also the country’s leading livestock player reported strong net profit growth in 9M14 by 125% to RM10.5m from RM4.7m in 9M13 on the back of 14.4% hike in revenue. The improved results were largely attributed to better margin achieved by the broiler operations as a result of lower raw material cost as well as new contribution from the layer business where the first production started in Sep 2013. With the layer operation, PW earnings are set to be better than pre-FY13.

· The largest broiler farming business in the north. PW is a leading livestock business group in Malaysia with comprehensive integration of business segments includes broiler farming, breeder farming, feed milling, raw material trading and repacking of agrichemicals. Currently, the group operates the largest broiler farming business in Penang, Perak and Kedah with capacity of 4m kg or 2m birds. It also operates one of the country’s largest feed mills in Bukit Minyak, Penang with installed capacity of c.21 mt/month, marketed under the “NUTRIFEEDS” trademark. With the increased feed requirement from its layer farm and expansion in milling service, the feed mill operations would see plant utilisation rate increasing to 91% from 81%.

· Layer business to lead growth. PW started its maiden layer business in Apr 2013 in Pendang, Kedah while the Phase 1 started maiden production in Sep 2013 with daily production of 420,000 eggs. This would contribute c.10% to group’s revenue a year. Currently, the expansion program, known as Phase 2, in the existing Phase 1 farm is on-going, which will be ready by this year-end or early 2016 with the same capacity of Phase 1. In addition, the group is also under the planning stage for Phase 3 & 4 in the same area of Pendang for similar egg production capacity as Phase 1 & 2 with the same total capex of RM40m. Phase 3 will kick start once Phase 2 is completed.

· Good potential in egg layering. As a newcomer, PW does not possess its own brand currently for its egg products, being mainly for wholesales. For a start, PW will do a new branding for its egg product for marketing purpose to gain brand awareness. Although there are many egg producers competing in the market, demand always outstripped supply according to the management. Furthermore, PW aims to enter the export markets which usually fetch premium prices. As such, layer operation will increasingly become a significant earnings driver of PW Group once the four phases of layer farm expansion are completed with contribution likely to enlarge to more than 40% from 10% currently.

· Trading Buy at RM1.90/share. With the strong 9M14 results, we project FY14 net profit to be 145.6% higher to RM13.1m, implying PER of 6.9x, thanks largely to the layering business. For FY15E, we expect another 8.4% jump in bottom-line on better efficiency and improving layer operations. One should look forward to its dividend payout expected next month in conjunction with its 4Q14 results release. We project 5 sen dividend, implying net yield of >3%, which is the same as FY13. Should PW is able to pay the same payout ratio as last year of 56%, the DPS could easily more than double our projection. At 20% discount to current FBMSC index of 10x, PW is valued at RM1.90/share (8x CY15 PER). Ex 1-for-5 bonus issue (ex-date: 20 Jan 2014), the adjusted fair value will be RM1.58/share. Hence, we advocate a Trading Buy on PW.

Source: Kenanga