Teo Seng Capital Bhd
(March 25, RM2.15)
Maintain buy with target price of RM2.70: We reaffirm buy on Teo Seng Capital Bhd (TSC) and raise our fair value from RM2.40 per share to RM2.70 per share. This is based on an unchanged fully diluted price-earnings ratio target of 13 times forecast financial year ending Dec 31, 2015 (FY15F), earnings.

We came away from the recent meetings we hosted for TSC and institutional funds with a more upbeat view on TSC’s prospects as a leading egg producer. We have raised our FY15F to FY17F earnings estimates by 9% to 15%.

Our earnings upgrade is pre-mised on expectations of stronger margins moving forward on the back of sustained higher selling prices of eggs and lower production costs. We now anticipate TSC’s FY15F to FY17F earnings before interest, taxes, depreciation and amortisation margins to expand by 2 percentage points (ppts) to 22% (versus 20% earlier).  

We understand that egg prices, which have been on an upward trend, reached an average peak price of 34 sen/egg in the fourth quarter of FY14. This was 10% above the historical average of 31 sen/egg. Management believes that prices will remain at current levels in the next six months given the robust demand.  

Management maintains that a key driver for the group over the next few years will be its rising production capacity (+400,000 eggs/day annually to reach 5.1 million eggs/day).  

This will underpin its aim of growing its market share by 3ppts to 9.6% in Malaysia. Management is confident of achieving this target given that the smaller players, which make up 73% of the market, are exiting due to the absence of successors and high land costs. For Singapore, to which it exports 30% of its production, TSC aims to raise its market share by 12ppts to 28% by FY19F. We believe this to be achievable given that the local producers’ current total production capacity of 1.2 million will be capped by limited land. 

TSC’s other competitive advantages include its lower cost structure (versus that for Singaporean players) and farm locations (all in Johor).  Although soft corn and soybean prices will benefit all poultry players, we believe TSC’s superior margins (+8ppts above its peers’ average) will remain intact given its “All-in-All-out” management system and efforts to monetise its wastes (e.g. its bio-gas plants will save RM2 million per year in electricity costs). 

The goods and services tax will not have any impact as eggs are zero-rated. — AmResearch, March 25

This article first appeared in The Edge Financial Daily, on March 26, 2015.