This article first appeared in The Edge Malaysia Weekly on August 5, 2024 - August 11, 2024

Last year was a banner year for Teo Seng Capital Bhd (KL:TEOSENG), with record-breaking sales and earnings, indicating significant market expansion despite a challenging operating environment as inflationary pressures drove up raw material costs.

The poultry group posted a record high revenue of RM760.98 million for the financial year ended Dec 31, 2023 (FY2023) — of which 87% was attributable to its poultry farming business — 17% more than the RM651.97 million it recorded in FY2022.

This exceptional performance was driven by a higher volume of eggs sold and a higher average selling price.

That, coupled with government subsidies, led Teo Seng to post a record high net profit of RM155.80 million in FY2023, over seven times higher than the RM21.64 million it made in FY2022, which was already over seven times the RM3 million it made in FY2021. The group made a net profit of RM4.2 million in FY2020.

The strong earnings growth trend resulted in Teo Seng being the winner of the Highest Growth In Profit After Tax Over Three Years award under the consumer products and services category of The Edge Malaysia Centurion Club Corporate Awards 2024, with an adjusted compound annual growth rate of 140.3%.

The group recognised a government subsidy of RM104.76 million under Program Subsidi Ayam dan Telur in FY2023. The objective of the programme was to ease the burden on chicken farmers amid an increase in production costs as there were ceiling prices for chicken and eggs.

The programme was in effect from Feb 5, 2022, to end-2023. Under the programme, eligible chicken farmers received cash when their applications were approved by the Department of Veterinary Services.

Even without the subsidy, Teo Seng’s net profit would have more than doubled to RM51.04 million in FY2023 from the RM21.64 million it made in FY2022, back-of-the-envelope calculations show.

This was due to the adoption of modern farm management techniques and equipment in its operations, such as auto-feeding, lighting controllers, ventilation, cooling pads, automated egg-collecting conveyor systems and an automated manure belt. These have helped Teo Seng increase its operational efficiency, reduce reliance on labour and minimise operational risks.

The company, in its latest annual report, deemed FY2023 a “remarkable year” given its stellar performance both operationally and financially, as well as management’s resilience and adaptability amid uncertainties and challenges such as geopolitical conflicts, inflationary pressures, persistently high interest rates, depreciation of the local currency and climate change.

Going into FY2024, Teo Seng expects these challenges to remain, though it anticipates Malaysia’s domestic consumption to stay resilient, bolstered by continued employment and wage growth, while the number of tourist arrivals and spending are expected to improve further.

“The operating environment shows signs of improvement with the softened prices of maize and soybean, which are essential ingredients of animal feed,” says Teo Seng, which is 56% controlled by Leong Hup International Bhd (KL:LHI).

The supply of eggs is expected to remain tight as production has been slashed due to the exit of household and small-scale farmers because of the rise in production costs as they lack competitive advantage, Teo Seng explains. The demand for eggs, meanwhile, is expected to grow at a moderate level, driven by its status as the cheapest source of protein, population growth and higher foreign tourist arrivals.

Teo Seng’s strong profitability extended into the first quarter ended March 31, 2024 (1QFY2024), with net profit climbing 73% to RM34.01 million from RM19.68 million a year ago, while revenue rose 3.6% to RM190.07 million from RM183.40 million.

Poultry farming continued to be the major driver of earnings, underpinned by the group’s cost effectiveness and coupled with the government’s egg subsidy.

Although Teo Seng is not widely covered by analysts, Hong Leong Investment Bank, in an unrated report in February this year, noted that its strong earnings momentum will likely be sustained in the next few quarters, supported by its enlarged production capacity from about 4.0 million eggs a day to 4.2 million eggs.

Further recognition of government subsidies and expansion into downstream products, such as producing boiled eggs and processing old hens, should broaden the group’s income stream as well, according to the investment bank.

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