Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily, on September 23, 2015.

Teo Seng Capital Bhd

TEO Seng (Fundamental: 1.5/3, Valuation: 1.9/3) is predominantly involved in layer farming — rearing chickens to produce eggs. With current production of 3 million eggs per day, it is one of the largest egg producer in the country. The company has its own in-house feed mill and also manufactures animal health products. 

We like Teo Seng as a well-managed company, with higher than industry average profit margin (trailing 12-month net margin of 13.1%) and lower than average gearing of 29.7%. It is also fairly inexpensive, trading at trailing 12-month P/E and EV/EBITDA of 7.96 and 5.48 times, respectively. 

Whilst demand for eggs is fairly resilient — and should grow steadily — earnings are affected by fluctuating egg prices and costs for feed stock, mainly corn and soybean meal, which are denominated in US dollar. 

Teo Seng’s share price rallied in 1Q2015, buoyed by higher egg prices and lower feed costs. But its shares then slumped to the current RM1.42, down 35.75% from a peak of RM2.21. This follows weak 2Q2015 earnings results where a sharp fall in egg prices — Grade “A” dropped from 37 cents to 29 cents — saw earnings drop 58.44% q-q to RM7.3 million.

Positively, egg prices are on the rebound and we expect better performance in 2H2015. This could be the catalyst for a fresh rally. Teo Seng has hedged about one year’s supply of animal feed in 2Q2015; thus, impact from recent weakening of ringgit will be minimal. It also exports about 27.75% of the revenue to Singapore and should benefit from the stronger Singapore dollar.

The company is expanding capacity, which should underpin longer-term growth. Dividends, however, may be cut back this year, in view of the higher capex. Teo Seng has a dividend policy to pay out 20-50% of annual net profits. We estimate dividends at roughly 5 sen per share — after taking into account the 1-for-2 bonus issue in January. That will earn shareholders a fairly decent yield of 3.52%.

Teo Seng Capital Bhd

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