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Thursday, November 19, 2015

AmResearch retains Buy for Teo Seng Capital

KUALA LUMPUR: AmResearch reiterated  its Buy call  for egg layer Teo Seng Capital (TSC) with an unchanged fair value of RM2.45 a share.

“We continue to peg our valuation to a fully-diluted FY16F PE of 13 times,” it said on Thursday, adding TSC was trading at an attractive fully-diluted FY16F PE of only eight times.

The research house pointed out this was a 47% discount to the average PE of 15x for the consumer companies under its coverage.

AmResearch continues to like TSC for its undemanding valuations, robust earnings growth (three-year compounded annual growth rate of  more than 15%) and expanding dividend payout (historically 25%, policy: 20%-50%).

 The research house said TSC clarified that its flattish on-year profit before tax for the nine months of FY15 and corresponding 1.5 percentage point margin contraction was primarily due to low egg prices (particularly in 2Q and a weaker-than-expected rebound in 3Q).

“We understand that a one sen decline in egg prices results in a RM1mil a 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 an egg for FY15F and 31 sen an egg for FY16F,” it said.

 AmResearch said TSC expects feedstock prices  to remain low and stable.

In 9MFY15, corn and soybean prices fell 20% and 17% on-year, 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.

“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 (gross profit margin of more than 20%).

“It foresees no impact from the minimum wage hike next year as most of its workers are paid above that level.
“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,” it said.

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