The minister of Agriculture and Food Security, Datuk Seri Mohamad Sabu announced last Wednesday that the government is considering ending the egg subsidy, a move that could save RM1.2bn annually. Currently, the subsidy of 10sen/egg applies to Grade A, B, and C eggs, with ceiling prices capped at 42sen, 40sen, and 38sen, respectively. Previously, the removal of the chicken subsidy and price controls did not affect the sustainability of chicken prices. We believe egg prices would similarly remain stable, with only a modest increase of 2-3sen, ensuring affordability for consumers. Poultry producers, who are already profitable under the current price cap, are expected to manage the impact thanks to lower feed costs and a stronger ringgit. No immediate revisions to earnings forecasts are expected, pending further details in the upcoming Budget 2025. Overall, we believe major players like LHI (TP: RM0.76/share) and QL (TP: RM4.84/share) stand to benefit from their cost efficiency and dominant market positions.

Termination of Egg Subsidy?

Recently, Agriculture and Food Security Minister Datuk Seri Mohamad Sabu announced that the government is considering terminating the egg subsidy, which could result in savings of RM100mn per month, or RM1.2bn annually. Currently, the subsidy is set at 10sen per egg for Grade A, B, and C eggs, with ceiling prices capped at 42sen, 40sen, and 38sen, respectively.

Before the pandemic, there were no subsidies on eggs, and prices were floated until the Covid-19 outbreak. Price controls were only introduced during the 2022 egg shortage, when production costs surged by 30%, causing producers to cut back on supply. To address the shortage, the government provided incentives to help stabilise the market supply and demand (refer to Table 2).

Case Study: What Happened When Chicken Subsidy and Price Controls Were Removed in November 2023?

With broiler chicken supply catching up to demand, the Malaysian government removed the ceiling price controls on broiler chicken, effective 1 November 2023, allowing market prices to float freely. At the same time, the broiler chicken subsidy was discontinued. By letting prices fluctuate according to market forces, the industry gains clearer insights into actual demand and supply dynamics. This approach promotes a healthier and more sustainable poultry industry in the long run. 

More importantly, the retail price of broiler chicken (per kg) did not experience a sharp increase following the termination of the subsidy. Chicken prices remained stable, fluctuating between RM6.49 and RM9.90 per kg (see Figure 1) over the subsequent months, while supply became more stable. As a result, the country benefited by saving RM100mn per month. 

Building on this observation, we believe that egg prices would not increase significantly and are likely to hover around 36-45sen per egg (we expect the ceiling price to be lifted as well) if the government ends the egg subsidy and removes price controls. Like chicken, eggs are a staple in the Malaysian diet. Even with a potential price rise, we anticipate that demand will remain resilient, as eggs will still be the most affordable source of protein. In 2022, per capita consumption of chicken meat reached 48.0 kg, while the average Malaysian consumed 374 table eggs per year - one of the highest rates in the world.

Additionally, Malaysia's poultry egg self-sufficiency ratio exceeds 100% (see Figure 3). In terms of supply, the country produced a total of 14bn eggs in 2022, surpassing the domestic demand of 12bn eggs annually. Notably, Malaysia ranks among the top 10 largest egg exporters in the world, with Singapore as its primary destination.

Our View

We believe the government's decision to reduce the retail prices of Grade A, B, and C chicken eggs nationwide by an additional 3sen each, effective 17 June 2024, aligns with its strategy to redirect savings from targeted subsidies to critical sectors like healthcare, education, and public transportation. The government had initially planned to float egg prices in July 2023 but postponed the move due to concerns about potential price hikes and their impact on consumers.

Given the successful removal of the chicken subsidy and ceiling price back in November 2023, it would not be surprising if the government opts to end the egg subsidy and ceiling price in the upcoming Budget 2025.

i) The most likely scenario: The government removes both the egg subsidies and ceiling price. Given the strengthening of the Ringgit and the reduction in input costs for chicken feed, we believe this is an opportune moment for the government to remove the egg subsidy and ceiling price. This would allow the market to adjust naturally while maintaining affordability.

Feed costs are the largest cost component for poultry farmers, making up about 70% of production costs. Corn accounts for up to 75% of chicken feed, with the rest being primarily soybean meal. YTD, corn prices have softened by 17.9% YoY to USD402.0 per 100 bushels, while soybean meal prices have contracted by 24.3% YoY to USD314.2 per tonne. Additionally, the Ringgit has strengthened from RM4.70/USD in January to the current level of RM4.31/USD, a 9.0% increase, making imports cheaper.

We believe that the current lower feed costs and a stronger Ringgit will benefit poultry companies in the short term by expanding their margins. With the expected removal of egg subsidies, poultry producers are likely to gain greater flexibility in adjusting selling prices in response to market demand and supply conditions. Thus, we expect the impact on poultry players to be minimal if the egg subsidy and ceiling price are lifted.

Regarding the expected selling price of eggs if subsidies are removed, we believe there will be no significant increase. Currently, the ex-farm gate prices for Grade A, B, and C eggs are 36sen, 34sen, and 32sen per egg, respectively (see Figure 6). Based on our channel checks, egg producers are currently profitable due to lower production costs and a stronger Ringgit. A survey of various e-commerce platforms (Aeon, Lotus, NSK, and 99 Speed Mart) shows that most retailers are offering eggs at the government-mandated ceiling price, except for premium varieties like omega and kampung eggs, which are not price-controlled.

Similarly, the Selangor Poultry Breeders Association does not anticipate a drastic increase in egg prices. Its deputy chairman, Idrus Zainal Abidin, stated that while the removal of the subsidy may affect operational costs, the impact is expected to be minimal. He indicated that any price increase could be around 2 to 3sen per egg.

ii) The government may decide to remove egg subsidies but keep or raise the ceiling price. Based on our estimates, the average current production cost of eggs ranges from 26sen to 34sen (depending on the company and layer farms), which is below the current ceiling price. Note that the average production cost of a chicken egg was recorded at 48sen in September 2022, according to the Department of Statistics Malaysia (DOSM) in its special report titled "Report of Special Study on Production Cost of Chicken and Egg, 2022."

However, if the Ringgit weakens and feed costs rise in the future, production costs may exceed the ceiling price. In this scenario, if the government does not lift the egg ceiling price, we anticipate that poultry producers would reduce supply once again, prompting the government to reimplement subsidies to stabilise the market. Producers might also opt to export eggs to Singapore or Hong Kong. Furthermore, without clear guidance on production levels, they may be forced to scale back operations if they lack the necessary funds to sustain themselves. Ultimately, we believe that egg prices should be allowed to float, enabling the supply and demand dynamics to rebalance and leading to selling prices that accurately reflect true market conditions. 

Impact to Poultry Stocks Under Our Coverage

Based on our back-of-the envelope calculations, Leong Hup International Berhad (LHI) and QL Resources Berhad (QL) sell approximately 3.3mn and 3.8mn eggs per day, respectively, in the Malaysian market. With the current subsidy of 10sen per egg for Grades A, B, and C, we project that LHI and QL would receive approximately RM84mn and RM97mn in subsidies annually from the government, assuming that 70% of the eggs sold fall within these grades.

Despite the potential removal of the egg subsidy, we believe that poultry producers will continue to be profitable, as production costs have dropped significantly YoY. Our findings indicate that current production costs are below the ceiling price. Producers would remain profitable even if the subsidy were removed at this juncture. In the past, subsidies were necessary because the ceiling price was lower than the cost of production, making it less feasible to continue production. This resulted in egg shortages for several months in 2022, and subsidies were crucial in encouraging production during that time.

For LHI's operations in Malaysia, assuming 10.5% (USD135mn) of its total raw material costs are denominated in USD, if the Ringgit appreciates by 10%, the company could potentially save approximately RM56.7mn (FY25: RM4.2/USD) in FY25 from foreign exchange alone. When combined with the lower prices of corn and soybean meal, the removal of the egg subsidy is unlikely to have a significant impact on LHI's earnings in the short term.

Similarly, in QL’s integrated livestock (ILF) segment, feed cost accounts for 80% of the group’s total cost of sales. Our estimates for FY25 suggest that a 10% appreciation in the Ringgit, along with lower raw material costs, would result in RM63.1mn in cost savings.

Recommendation

The share price of LHI has dropped 4.9%, while QL has remained steady at RM4.69/share since Datuk Seri Mohamad Sabu’s announcement regarding the proposal to remove the egg subsidy last Wednesday. We believe that major players like LHI and QL will benefit from their cost efficiency and strong market positions. Therefore, we see this as a good opportunity to accumulate shares of LHI as we anticipate that performance in the 2HFY24 will be supported by lower input costs. We derive a target price of RM0.76/share for LHI, using a 9x CY25 EPS which in line with its peers. Meanwhile, we maintain our Hold recommendation on QL with a target price of RM4.84/share based on DCF valuation (k: 6.1%; g: 3.0%). Our DCF analysis is based on QL’s resilient earnings growth and cash flow stability going forward