This article first appeared in The Edge Financial Daily, on November 20, 2015.

Teo Seng Capital Bhd
(Nov 19, RM1.60)
Maintain buy with an unchanged fair value of RM2.45: We hosted a corporate luncheon with key personnel from Teo Seng Capital Bhd (TSC) and institutional funds on Wednesday, and came away assured of the group’s earnings prospects and position as a leading egg producer. We continue to like TSC for its undemanding valuations, robust earnings growth (three-year compound annual growth rate: +15%) and expanding dividend payout (historically 25%, policy: 20% to 50%).

The management clarified that its flattish year-on-year (y-o-y) profit before tax for the first nine months of financial year 2015 (9MFY15) and corresponding 1.5-percentage-point margin contraction were primarily due to low egg prices, particularly in the second quarter of FY15 (2QFY15) and a weaker-than-expected rebound in 3QFY15.

We understand that a one sen decline in egg prices results in a RM1 million per month decline in the group’s net profit. Looking ahead, the management expects prices to rise in 4QFY15 in tandem with year-end festivities, and to average at 30 sen per egg for FY15 and 31 sen per egg for FY16.

The group’s expansion plans remain on track. Although it only added one new farm in FY15 (this month; the target was two), it still met its production capacity of 3.3 million eggs per day as it had added new “houses” to its existing farms instead of building a new farm. We understand that land for its FY16 expansion (one farm; capacity: +13%) has been secured.

Demand from Singapore, to which it exports 30% of its egg production, remains robust. While the group can still gain from the stronger Singapore dollar versus the ringgit, we note that the price differential between the two markets has narrowed to two sen per egg from five sen per egg just two months ago.

Feedstock prices are expected to remain low and stable moving forward. In 9MFY15, corn and soybean prices were lower by 20% and 17% y-o-y respectively. However, after foreign-exchange adjustments, they were only lower by 1.2% and 1.5% respectively. The group has bought forward its raw materials up to 1QFY16.

TSC’s superior margins are expected to remain stable. Any price weakness may be offset by energy-cost savings at its biogas plant-ups, use of natural gas for egg tray production and margin enhancements from external sales of paper egg trays (gross profit margin of 20+%). It foresees no impact from the minimum wage hike next year as most of its workers are paid above that level at RM1,400.

We leave our FY15F (forecast) to FY17F earnings estimates unchanged for now in view of our recent downward revision (-19% to -24%) post the release of its 9MFY15 results.

TSC’s present valuations are undemanding. The stock is currently trading at an attractive fully diluted FY16 price-earnings ratio (PER) of only eight times. This is a 47% discount to the average PER of 15 times for the consumer companies under our coverage. — AmResearch, Nov 19