• MYR2.19 FV based on 6x FY24F P/E. We expect Teo Seng Capital to book a record-high earnings this year on elevated egg prices, a higher number of sales, and collection of “delayed profits”. When the egg ceiling price and subsidy regulations are uplifted by the Government in 2024, we expect better cash flows – there will be immediate profits collected upon sales of eggs. Coupled with >6% FY24F dividend yield, TSCB is offering a palatable valuation trading at just 3.7x FY24F P/E.

• 2H23 expected to see more explosive growth. Selling prices have been relatively stable in recent months since 1Q23 – this partially contributed to TSCB’s stellar 2Q23 performance. We expect prices to be sustainable in the near term, supported by egg consumption growth and persistent shortages of eggs in Malaysia. We anticipate the robust momentum to accelerate into 2H23 in view of stronger seasonality and the easing of feed costs. We highlight the current prices of corn and soybean meal (Figures 5 and 6) – the key ingredients of poultry feed – have fallen 24.2% and 7.8% from 2023’s YTD peak. We believe this should support the profit margins of the egg and layer hen businesses. Looking beyond FY23, with the uplifting of ceiling prices and subsidy on eggs in 2024, management expects egg prices to adjust to post-subsidy prices, ie c.48 sen/egg.

• Ongoing capacity upgrade to drive bottomline growth. As shown in Figure 8, TSCB recently restarted its aim to upgrade existing farm facilities and equipment (Figure 20 shows the automation equipment and doublestorey bird-house) that would allow it to reach daily egg production of 4.5m eggs by 4Q24 (indicating a 12% rise egg production growth from 2022 to 2024). The existing capacity for layer hen farming is 5.5m birds and TSCB has a daily laying level of c.4.3m eggs – this followed the upgrading of its existing farms vis-à-vis the pre-pandemic level of 3.74m eggs/day. In addition to exporting c.25% of its eggs to Singapore, TSCB increased sales through direct channels to c.42% in 1H23 from <20% in 2018, which allows the group to save on wholesalers’ agency fees.

• Industry consolidation facilitating market share gains. We believe consolidation within layer hens farming industry will continue over the longer term. This is due to: i) Rising land prices, ii) high investment costs (especially to convert from an open-house system to a closed-house one), and iii) increasingly stringent regulatory requirements (especially for approvals on new farm openings). This will facilitate market share gains for major players like TSCB, in our view, coupled with having strong support from parent Leong Hup International (LHIB MK, BUY, TP: MYR0.72). Additionally, TSCB’s in-house feed mill and egg trays production gives it an edge in terms of costs and quality control.

• Earnings forecast and valuation. We forecast a 3-year earnings CAGR of 72.2% and ascribe 6x P/E on its FY24F earnings to derive its MYR2.19 FV. Key risks: Fluctuations in supply and feed prices, diseases, egg price instability, and export bans on eggs.

Source: RHB Securities Research - 20 Nov 2023