TEOSENG is set to benefit from normalising egg prices and favourable input prices. In addition, the group is regionally diversified and on track to produce 5.0m eggs/day by FY22. Trading BUY with a TP of RM1.45 based on a PER of 10x on FY20E EPS premised on: (i) more stable egg price and cost environment in the future, (ii) increasing diversification in export markets, (iii) gradual expansion in its complementary businesses to provide better earnings security, and (iv) more robust dividend yields backed by better earnings visibility.

TEOSENG’s revenue achieved a CAGR of 6.5% from FY14- FY18, backed by the group’s expansion plan since FY14 to achieve an output of 5.0m eggs/day (+67%) by FY22. The group’s capacity currently stands at 4.0m eggs/day. Throughout this period, the group has expanded its market regionally to even out cyclical risk with exports accounting for 40% of its FY18 sales. This is evident through its strategic farm locations primarily located in Johor, of which half is accredited by the Singapore Food Agency. The group also benefits from the higher egg ASP (c.3-4 sen higher) in Singapore which translates into better margins.

TEOSENG is the only egg player in Malaysia with complementary businesses such as: (i) feed mill plant; (ii) animal and health care product; (iii) paper egg tray plant; (iv) automated fertiliser plant; and (v) a central packaging system. This provides better operational efficiency and reduces reliance from third party sources. The synergies are demonstrated by the group’s better PBT margin of 8.4% in FY18 as compared to LTKM of 4.0%. In addition, we believe such business structure could be difficult to replicate as it requires scale and expertise.

We expect a seasonally stronger 2HFY19 for the group with higher sales volume supported by the progressive expansion of the group’s daily egg production capacity. With this, we believe FY19E/FY20E sales could amount to RM574.0m/RM605.5m (+17%/+6%) driven by the said higher sales volume. Meanwhile, earnings could improve to RM41.3m/RM43.2m (+36%/+5%) due to better operational efficiency and margins attributed to its complementary businesses and better egg prices. We also impute a dividend pay-out of 30% (4.1sen/4.3sen), as the company’s intended pay-out policy stands at 20-50% of PAT.

Source: Rakuten Research - 23 Oct 2019