There would not be any significant increase in the price of eggs should the subsidies be removed, TA Research said.
PETALING JAYA: Poultry players Leong Hup International Bhd
and QL Resources Bhd are likely to benefit from the removal of price controls for eggs due to their cost efficiency and strong market positions.
According to TA Research, the government may announce the removal of both price controls and subsidies for eggs today, following the reduction of subsidies for various egg grades by three sen effective June 17, 2024.
There would not be any significant increase in the price of eggs should the subsidies be removed, it said, citing the Selangor Poultry Breeders Association deputy chairman Idrus Zainal Abidin, who said any price increase could be around two to three sen per egg.
The research house saw an opportune moment to remove price controls and subsidies due to the strengthening ringgit and lower input costs for chicken feed.
“We believe that the current lower feed costs and a stronger ringgit will benefit poultry companies in the short term by expanding their margins,” it said.
TA Resarch added that poultry producers would see minimal impact from the removal of subsidies and price controls, and would likely gain greater flexibility in adjusting selling prices in response to market demand and supply conditions.
Another option would be for the government to remove subsidies but either keep or raise the ceiling price.
In this scenario, any future weakening of the ringgit and higher feed costs, without a rise in the ceiling price, could force poultry producers to reduce supply.
This might prompt the government to reinstate the subsidies.
Additionally, producers could opt to export their products or scale back operations to ensure financial sustainability, the research house explained.
Reiterating its stance that egg prices should be allowed to float while allowing the supply and demand dynamics to seek out market prices, the research house said poultry producers would continue to be profitable, as production costs have dropped significantly year-on-year.
“Our findings indicate that current production costs are below the ceiling price. Producers would remain profitable even if the subsidies were removed at this juncture,” it said.
The research house recommends accumulating Leong Hup shares as it anticipates the company’s performance in the second-half of financial year ending Dec 31, 2024, to be supported by lower input costs.
It has a “buy” call on the stock with a target price of 76 sen a share.
“Meanwhile, we maintain our ‘hold’ recommendation on QL with a target price of RM4.84 per share based on discounted cash flow (DCF) valuation.
“Our DCF analysis is based on QL’s resilient earnings growth and cash flow stability going forward,” it added.
