PETALING JAYA: Teo Seng Capital Bhd
is expected to sustain strong earnings through cost efficiencies and steady demand driven by population growth and tourism going forward.
This will be supported by its planned distribution centre in Pahang, which will bolster supply chain efficiency for its top mini-market chain client, said RHB Research.
Assuming eight months of subsidy collection in financial year 2024 (FY24) and egg prices free-floating from January 2025, the brokerage projects a 2022-25 compounded annual growth rate of 125% in earnings with a sustained net margin of 20%.
“As one of Malaysia’s top three egg producers with an over 13% market share, the company benefits from economies of scale, particularly in bulk raw material purchases, helping lower production costs.
“This advantage, combined with a 9% annual increase in output and facility upgrades, are set to boost its margin,” said RHB Research in a note to clients.
Currently, the company exports 20% of its eggs to Singapore and has increased direct sales from under 20% in 2018 to 62% in the first half 2024 (1H24) – saving up to three sen per egg by bypassing wholesalers.
It aimed to boost the share of larger eggs (Grade C and above) from the current 76% (versus 70% in 2018) and expand downstream in 2025 with soft-boiled and flavoured eggs.
Despite the group’s average selling price for eggs dropping 14% year-on-year (y-o-y) in the second quarter 2024 (2Q24) with a further 8% decline seen in 2H24 as the price ceiling was reduced by three sen starting mid-June 2024, RHB Research said the current prices of corn and soybean meal – key ingredients in poultry feed – have fallen about 40% and 25% y-o-y, respectively.
With ringgit strengthening by 10% y-o-y, the research house expects Teo Seng Capital’s profit margin to improve tremendously as a net importer.
It derived a fair price of RM4.26 per share after applying a price-to-earnings (PE) ratio of 7.5 times to FY25 earnings.
The key risks cited include fluctuations in supply and feed prices, chicken diseases and instability in egg prices.
“With attractive dividend yields of 10.3% (annualised) and 7.2% for 2H24 and FY25. respectively, Teo Seng Capital should be rerated from its low 4.2 times FY25 PE (ratio),” it added.
