This article first appeared in Capital, The Edge Malaysia Weekly on March 6, 2023 - March 12, 2023

AGRICULTURE and Food Security Minister Datuk Seri Mohamad Sabu said last month that the prices of chicken and eggs are expected to be floated after June, as part of the government’s efforts to overcome food shortages.

Although the details are scarce, analysts generally expect the blanket subsidy for poultry players to be removed by then, as the government is trying to implement targeted subsidies for the bottom 40 income group (B40). They are of the view that the removal of the price cap should provide support to poultry producers and allow them to achieve better margins, but managing operating costs may not be an easy task.

Kenanga Research analyst Ahmad Ramzani Ramli tells The Edge, “Even if the subsidy is removed, poultry players’ profitability will not be affected as they can increase their selling prices.”

Feedstock supply is the key issue, given the prolonged Russia-Ukraine conflict, he highlights. He observes that the prices of corn and maize are still trending upwards. “Some indicators show that prices will go up until end-2023. It’s a concern for poultry producers.”

While poultry players will still be able to record top-line growth in view of eggs and chicken being daily necessities, Ramzani warns that they could face “a challenging time” as the fluctuations in the price of key raw materials are beyond their control.

Malacca Securities analyst Ng Hui Yee agrees, saying that although the supply of eggs in Malaysia appears to have stabilised, the uncertainties for the poultry industry do not only come from the price control mechanism, but also the elevated cost of raw materials. “Maize and soybean prices may continue to fluctuate in the upcoming quarters due to irregular demand and supply dynamics on the global front.”

MIDF Research notes in a Feb 16 report that the prices of animal feed, namely soybean meal and corn, increased in January, with the average price of soybean meal and corn rising 27.7% and 9.2% year on year (y-o-y) respectively. On a monthly basis, they were 4.9% and 1.4% higher.

The research house anticipates that the higher feedstock prices will exert pressure on the margins of poultry players. For perspective, feed cost constitutes about 70% of chicken production costs. Corn makes up about 50% of the feed cost and soybean meal about 25%.

According to the “Report of Special Study on Production Cost of Chicken and Egg, 2022” published by the Department of Statistics last December, the largest components of production costs for chicken broilers in September were poultry feed (65.1%) and the cost of purchasing day-old chicks (16%). Meanwhile, 76.2% of egg production costs were poultry feed and 15.8% were utilities, salaries and wage costs.

According to the Ministry of Agriculture and Food Security, the subsidy for eggs will continue until June, with a total cost of RM1.28 billion to ensure a stable supply in the market. A total of 18,880 applications for the subsidy worth RM1.69 billion had been approved for chicken farmers and egg producers as at Feb 15, said Mat Sabu.

The current retail price ceiling in Peninsular Malaysia for standard chicken is RM9.40 per kg, up from RM8.90 previously, following claims that poultry players were suffering from thin margins amid the rising cost of production. For eggs, the price ceiling is 45 sen for Grade A, 43 sen for Grade B and 41 sen for Grade C.

It is estimated that the average monthly supply of chickens will show a surplus of 16.85 million in 1Q2023, while eggs will have a surplus of 119.86 million.

At the time of writing, the Federation of Livestock Farmers’ Associations of Malaysia had not responded to queries sent by The Edge.

Malacca Securities’ Ng notes that the operating environment will remain challenging in the short term in view of the elevated feed cost, as there has been a price ceiling on eggs since November 2022.

The price of Grade C chicken eggs rose 2% y-o-y to 35 sen in 4Q2022, in tandem with the higher feed cost. She expects the price to hover at 35 sen in the near future.

Owing to the lower feed cost and subsidy from the government, poultry players enjoyed better margins in the last quarter of 2022, with all companies registering higher earnings y-o-y.

Leong Hup International Bhd’s net profit more than doubled to RM90.71 million during the quarter from RM37.99 million in the previous corresponding quarter, driven by higher sales in all operating markets except Singapore.

Similarly, CAB Cakaran Corp Bhd saw its net earnings surge to RM41.87 million from RM18.19 million a year earlier, thanks to higher average selling prices of feed, processed chicken and most processed food products. Last month, the company announced that it had expanded into the premium downstream food segment to cushion against the fluctuations in its profit margin and to boost its financial performance.

QL Resources Bhd, one of the largest producers of surimi and eggs in Southeast Asia, reported a 62.5% increase in net profit to RM97.18 million in the last quarter of 2022.

However, CGS-CIMB Research expects QL Resources to record weaker quarter-on-quarter (q-o-q) results for the January to March 2023 period, due to rains that could affect its marine product manufacturing (MPM) segment. Also, the lower feed cost subsidy will weigh on its integrated livestock farming (ILF) segment. Nevertheless, it foresees the group posting a robust net profit growth of 57.1% in FY2023, supported by the MPM, ILF and convenience store chain (CSC) segments.

“Beyond FY2023, we expect QL’s growth to slow to 7% in FY2024 as we account for weaker consumer sentiment as well as rising inflationary pressures,” the research house said in a March 1 note.

On a q-o-q basis, only CCK Consolidated Holdings Bhd reported a contraction of 50.8% in net profit, mainly due to the high base effect as a result of a one-off gain from the disposal of an investment property, as well as the subsidy from the government.

An analyst who declined to be named is cautious about poultry players’ financial performance in the first half of 2023, having factored in the high feed cost. “The last quarter is typically the strongest quarter, that’s why we saw decent results from poultry players in the last quarter of 2022. However, we have to monitor to see if the momentum can be sustained. I believe there will be more earnings certainty in the second half of the year.”

Malacca Securities’ Ng believes Teo Seng Capital Bhd is in a better position than its peers to mitigate the impact of the price control mechanism and elevated feed cost.

“Teo Seng is seeking opportunities to gradually grow its export market to enjoy better margins. The group has developed more direct sales channels such as distribution centres and direct sales teams to sell at a better pricing,” she says.

In terms of share price performance, CCK is the top performer among the poultry players as its share price has gained 10.9% in the last three months and 28.8% over the last six months. CAB Cakaran has seen its share price rise 7.4% in the last three months, QL Resources 5.6% and Lay Hong Bhd 3.9%, but Teo Seng has slipped 3.2%.

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