KUALA LUMPUR (Oct 17:) TA Securities expects egg prices to increase by just two- to three sen if the government proceeds with the removal of its 10 sen subsidy, easing concerns of a sharp price hike.

In a note on Thursday, the research house said that the potential subsidy removal, which may be addressed in the upcoming Budget 2025, could result in savings of RM100 million monthly, or RM1.2 billion annually.

This would act as part of the government’s strategy to redirect savings from targeted subsidies to critical sectors like healthcare, education, and public transportation.

The subsidy, introduced during the 2022 egg shortage, currently caps prices at 42 sen for Grade A eggs, 40 sen for Grade B, and 38 sen for Grade C. 

Despite the potential end of the subsidy, the house added that the price increase will likely be minimal, thanks to lower production costs and a stronger ringgit. Meanwhile, corn and soybean meal prices, which account for the majority of poultry feed costs, are down by 17.9% and 24.3% year-on-year (y-o-y).

These lower feed costs, along with the appreciation of the ringgit, which has made imports cheaper, will help poultry producers absorb the impact of the subsidy removal.

“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,” the house added.

TA Securities also believes that major industry players like Leong Hup International Bhd (KL:LHI) and QL Resources Bhd (KL:QL), which produce millions of eggs daily, are well-positioned to manage the impact.

“We believe that major players like LHI and QL will benefit from their cost efficiency and strong market positions,” TA Securities said.

As a result, the house views this as a favourable opportunity to acquire shares of Leong Hup, as it expects Leong Hup’s performance in the second half of FY2024 to benefit from reduced input costs.

TA Securities maintained its “buy” call on Leong Hup, with a target price (TP) of 76 sen, while it maintained its “hold” call on QL Resources, with a TP of RM4.84, with no changes to earnings forecasts on both stocks at this juncture.

At time of writing on Thursday, Leong Hup’s share price was unchanged at 74 sen, valuing the company at RM2.70 billion, while QL Resources was up two sen or 0.43% at RM4.72, giving it a market capitalisation of RM17.23 billion.