Teo Seng Capital (7252) is a Malaysian-based integrated layer farming company with diverse business operations. Its core activities include feedmill operations, production of paper egg trays, manufacturing of animal health products, egg processing, and fertilizer production. Teo Seng's business is segmented into two main divisions: poultry farming and investment/trading of other poultry-related products. BUY with a TP of RM2.90 based in FY24F PE of 6x, in line with industry peers.

Supported by strong demand, the company plans to augment its egg production capacity by 4.5m eggs per day in FY24, thereby stimulating prospective earnings. Additionally, in response to evolving consumer preferences, Teo Seng is broadening its product portfolio to include downstream offerings such as boiled eggs and processed old hen products. These strategic initiatives are expected to yield enhanced and stable margins compared to its core products.

Despite temporary subsidies and price ceilings to persist until 1H24, egg prices, particularly for table eggs, are forecasted to remain elevated due to high production costs. Looking ahead to fiscal year 2024, with the removal of price ceilings and subsidies on eggs, management foresees egg prices adjusting to postsubsidy levels, approximately 48sen/egg from 43sen currently.

Therefore, we anticipate Teo Seng's financial performance to remain strong in the coming quarters, driven by higher egg production. We project Teo Seng’s FY22-25F core net profit to register a strong CAGR of 77%, underpinned by capacity and product range expansions in the layer farming segment, along with steady contributions from the animal health product distribution segment.

This stock currently trades at an attractive FY24F PE of 4.7x, which is below the 5-year forward average of 8x. Though the company's current net gearing of 26.6x in rather exorbitant, Teo Seng is poised to address this by pairing down its debts via its strong cash flow upon the upliftment of egg ceiling price and subsidy regulations by the Government in 2024. Meanwhile, Teo Seng offers an attractive dividend yield of 6%, assuming a 30% dividend payout ratio, with the board intending to distribute dividends ranging from 20%-50% of its PAT.

Source: Rakuten Research - 20 Feb 2024

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