• Teo Seng’s 4Q2019 net profit fell 21.2% Y.o.Y to RM13.6 mln, lifted by higher production and sale of chicken eggs, higher average selling prices (ASP) of chicken eggs and improved demand for animal health products. Revenue for the quarter declined 7.0% Y.o.Y to RM137.0 mln, due to lower turnover from the poultry farming segment.

• For 2019, cumulative net profit jumped 93.8% Y.o.Y to RM58.8 mln. Revenue for the year gained 11.6% Y.o.Y to RM547.1 mln. Both the reported earnings and revenue came in line with our expectations, making up to 101.6% and 97.8% of our forecast of RM57.9 mln and RM559.3 mln respectively.

• Segment wise in 4Q2019, the poultry farming segment’s pretax profit dipped 24.2% Y.o.Y to RM15.6 mln, dragged down by the lower ASP of chicken eggs that offset the increase in sales quantity. The trading segment’s pretax profit slipped 38.4% Y.o.Y to RM2.6 mln on higher operational costs that offset the stronger sales performance due to additional products being added.

• As of 4Q2019, Teo Seng’s gearing is reduced to 52.5% (from 54.7% recorded in 3Q2019). Moving forward, we expect Teo Seng’s gearing level to stable as the group continues to hinge on external funding for its long-term expansion plans, targeting production of 5.0 mln eggs per day by end-2022.

Prospects

We gather that the rally in ASP of chicken eggs have tapered since mid-October 2019 (see Appendix 1) to approximately RM0.34 per Grade C chicken egg as at end-4Q2019 vs. approximately RM0.35 per egg recorded in 3Q2019. Cost wise, soybean prices (see trended slightly higher, hitting the highest level since May 2018. Maize prices, however, remained soft, falling -2.1% Q.o.Q, reflecting the potentially favorable production in 2020 following the rainfall deficits in October 2019 and November 2019 (see Appendix 2).

The recent renewed volatility of the Ringgit against the Greenback bodes well for Teo Seng in terms of feed cost and its’ export segment. We reckon that that Ringgit may remain downbeat in view of the poor economic data performance as demonstrated in 4Q2019 GDP. In the meantime, demand is widely to remain stable as Malaysia remains free of Avian flu for the time being. We continue to like Teo Seng for its established presence in the Hong Kong and Singapore market. As of 2019, Malaysia exported a total of 48.0 mln eggs, of chich 42.4% or 20.3 mln eggs were exported to Hong Kong.

Moving into 2020, Teo Seng aims to produce approximately 4.1 mln eggs per day by end-2020 as the completion of feedmill plant expansion in 2018 will cater for the increasing number of chickens.

Valuation And Recommendation

With the reported earnings coming within our expectations, we made no changes to our earnings. Consequently, we maintained our BUY recommendation on Teo Seng with an unchanged higher target price of RM1.65. We arrive our target price by ascribing an unchanged target PER of 8.0x to its 2020 EPS of 20.6 sen.

We continue to like Teo Seng as it is one of the largest vertically integrated chicken egg players in Malaysia, backed by its gradual production expansion plans. We reckon that the recent weakness of share price has already reflected the potential dilution of warrants and the pullback of chicken eggs prices. Current prospective PERs trading at 5.6x and 5.3x for 2020 and 2021 respectively are also relatively attractive.

Risks to our recommendation include avian influenza outbreak – a viral infection that can infect not only birds, but also humans and other animals. Chicken feed (mainly soybean and maize) makes up 70% of its feed cost. Stronger commodity prices (soybean and maize) will negatively impact its margins and vice versa. A firmer Ringgit against the U.S. Dollar could also affect the group’s bottom line as a recovery in the local currency against the Greenback will have a positive impact on the group’s earnings and vice versa, as the commodity purchases are denominated in U.S. Dollars.

Source: Mplus Research - 14 Feb 2020