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Wednesday, July 22, 2015

Teo Seng Capital - Prospects intact

- We maintain our BUY rating on Teo Seng Capital (TSC) with an unchanged fair value of RM2.70/share. This is based on an unchanged fully-diluted target PE of 13x on FY15F earnings.

- We came away from a recent meeting with management reassured about its prospects as a leading egg producer. Our BUY call continues to be premised on:- (1) TSC’s favourable industry dynamics (steady demand growth of 3%-5% p.a.); (2) a strong management track record and parentage; (3) the scarcity of good consumer stocks trading at low PEs; (4) robust earnings growth (3-year CAGR of 23%); and (5) its expanding dividend payout.

- We are not overly concerned by the recent decline in egg prices (QoQ: -24% from the average peak price of 34 sen/egg registered in 4QFY14 and 1QFY15). Management said this was primarily due to seasonality (i.e. absence of festivities and the fasting month) and to a smaller extent, the impact of GST on overall consumer sentiment. Note that egg prices are still presently above the average breakeven price of 24 sen/egg.

- Following this, we expect TSC to register sequentially softer earnings for 2QFY15. Nonetheless, we are confident of earnings rebounding in 2HFY15 (as per its historical trend) in view of stronger demand during the festive periods (such as Hari Raya) and the addition of two new farms in July and November (capacity +25% from 3.1mil eggs per day currently).

- While the weaker egg prices will put pressure on margins, we believe that this will be more than offset by the group’s projected 10% (or 2 sen/egg) decline in production costs in FY15F. We thus expect TSC’s superior EBITDA margins to remain intact at ~21%.

- We understand that TSC has taken advantage of the earlier softness in corn and soybean meal prices by extending its forward purchases from three to six months (i.e. to December 2015). Even after assuming a conservative USD:RM exchange rate of RM3.70, its feedstock purchase costs are 11%-21% below the current spot rates.

- Beside lower raw material prices, TSC can also look forward to energy cost savings of RM1.5mil p.a. following the completion of its exercise to utilise natural gas (vs. LPG previously) for its egg tray production in May 2015. TSC’s biogas plant-ups are also progressing well, with the first (of five) plants on schedule for completion this year. This translates to potential electricity savings of ~RM2mil p.a. (per plant) for the group.

- We are keeping our assumptions and forecasts for now given the absence of any material changes. The recent steep order-driven sell-down of the stock saw its forward fullydiluted PE falling to 6x. In tandem with its share price recovery, its FY15F fully-diluted PE now stands at 8x. This is still undemanding given that it is at a 55% discount to the average 17x for the consumer companies under our coverage.

Source: AmeSecurities Research - 22 Jul 2015

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