Friday 29 Mar 2024
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eggs-afp_28_1059FALLING corn and soybean prices have put  poultry and egg producers — that not too long ago were suffering from oversupply and unexciting margins — back on the radar of investors.

The share prices of egg producers like QL Resources Bhd, Lay Hong Bhd, LTKM Bhd and Teo Seng Capital Bhd have risen near to, or are at all-time highs. The upward trend since January is one sign of interest stirring again in poultry stocks.

According to an industry veteran, while lower raw material prices has boosted the overall industry, egg producers are expected to outperform their broiler counterparts.

“The next six to nine months, we will see egg producers performing well. Broilers, however, are still seeing an oversupply situation, and would be losing money if not for the current low feed prices,” he tells The Edge.

Kenanga Research analyst Soong Wei Siang notes that the average selling price of eggs rose about 7% to 8% on a month-on-month basis towards the end of last year.

“Early this year, the momentum was still there. This directly translates into earnings for poultry players,” he says.

The Newcastle virus, a contagious bird disease that is transmissible to humans, had also affected several farms at the end of last year, affecting egg production and resulting in higher egg prices, notes Soong.

“This comes up from time to time, so it’s not something new. However, it takes about two to three months to get rid of the virus,” he says. The supply of eggs is likely to normalise within the next one or two months.  

Egg prices also rose due to supply disruption when sales of products by three farms — Charoen Pokphand Jaya, Chong Ne Nam and Teo Seng Farm 8 — were suspended by the Agri-Food & Veterinary Authority of Singapore after their eggs were found to contain salmonella enteritidis, a bacterium that causes food poisoning.

“Singapore’s egg supply is dominated by Malaysian players, which collectively command a 72% market share,” says AmResearch analyst Crystal Tan. The island state imports about four million eggs daily from Malaysia.

However, for poultry players that depend more on the sale of broilers, such as Huat Lai Resources Bhd and PW Consolidated Bhd, the situation is not as upbeat.

An oversupply, resulting in weaker selling prices, saw earnings being dragged down.

For the fourth quarter ended Dec 31, 2014, PW Consolidated also saw lower revenue because the floods that hit the east coast last December impacted broiler sales.

According to the industry veteran, low raw material prices have been the saving grace for the broiler players.

Nevertheless, the regulated price of broilers during festive seasons have continued to rise over the last three years . The price ceiling for live chickens during the recent Chinese New Year increased by 27% to RM5.20 per kg in 2014 from RM4.10 in 2012, according to  statistics from the Federation of Livestock Farmers’ Associations for Malaysia.

The industry player says it would have been a “fantastic year” for broiler producers if not for the gradual depreciation of the ringgit against the US dollar.

“If the ringgit had stayed at the mid-2014 levels of 3.2 against the US dollar, 2015 would have been a fantastic year for the industry.”

He adds that raw material prices should remain in a “reasonably low” range this year.

The ringgit has since fallen by 16% to 3.718 to the US dollar last Friday.

Purchases of animal feed  — mainly corn and soybean  for poultry — are US dollar denominated.

Animal feed prices make up a substantial portion of total production cost — in the case of Teo Seng and CAB Cakaran Bhd, as much as 70% and 65%, respectively.

For comparison, corn futures on the Chicago Board of Trade has nearly halved to 373 points from more than 700 points two years ago. Soybean futures have also dropped by one third to 961 points from 1,420 points.

The fall in crude oil prices has affected demand for corn — an ingredient used for biofuels. Low oil prices also means falling demand for biofuels.

The renewed interest in the poultry industy  would also benefit companies offering animal health care services such as SCC Holdings Bhd, Peterlabs Holdings Bhd and Sunzen Biotech Bhd.

“In view of the margin expansion and post- industry consolidation phase, we now see increased livestock production. We foresee demand for animal health products increasing in tandem,” says Law.

The Goods and Services Tax that takes effect next month is unlikely to impact demand for broilers and eggs, as both are zero-rated and exempted from the tax, analysts say. As they are staple products, demand is expected to remain consistent regardless of overall consumer sentiment.

 

This article first appeared in The Edge Malaysia Weekly, on March 23 - 29, 2015.

 

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