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Thursday, November 19, 2015

Teo Seng Capital - Key takeaways from corporate luncheon BUY

- We reiterate BUY on Teo Seng Capital (TSC) with an unchanged fair value of RM2.45/share. We continue to peg our valuation to a fully-diluted FY16F PE of 13x.

- We hosted a corporate luncheon with key personnel from TSC and institutional funds yesterday, 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 (3-year CAGR: +15%) and expanding dividend payout (historically 25%, policy: 20%-50%).

- Key takeaways from the luncheon:

(1) Management clarified that its flattish YoY PBT for 9MFY15 and corresponding 1.5ppt margin contraction was primarily due to low egg prices (particularly in 2Q and a weaker-than-expected rebound in 3Q). We understand that a 1 sen decline in egg prices results in a RM1mil/month decline in the group’s net profit. Looking ahead, management expects prices to rise in 4QFY15 in tandem with year-end festivities, and to average at 30 sen/egg for FY15F and 31 sen/egg for FY16F.

(2) The group’s expansion plans remain on track. Although it only added one new farm in FY15F (in Nov; target was 2), it still met its production capacity of 3.3mil 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 FY16F’s expansion (1 farm, capacity +13%) has been secured.

(3) Demand from Singapore, to which it exports 30% of its egg production, remains robust. While the group can still gain from the stronger SGD vs RM, we note that the price differential between the two markets has narrowed to 2 sen/egg from 5 sen/egg just two months ago.

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

(5) TSC’s superior margins are expected to remain stable. Any price weakness may be offset by energy cost savings from its biogas plant-ups, use of natural gas for egg tray production, and margin enhancements from external sales of paper egg trays (GP 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-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 FY16F PE of only 8x. This is a 47% discount to the average PE of 15x for the consumer companies under our coverage.
Source: AmeSecurities Research - 19 Nov 2015

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