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Saturday, May 11, 2019

Is Teo Seng undervalued at RM1.32?

Saturday, 11 May 2019
by p. aruna

Egg-citing: Teo Seng has drawn investor-attention after recording a stunning 234% increase in net profit during the first quarter ended March 31.

AFTER posting an excellent set of quarterly results, and with its substantial shareholder Leong Hup International Bhd returning to the stock exchange for a highly-anticipated initial public offering (IPO) next week, Teo Seng Capital Bhd
image: is in the limelight.

The egg producer has drawn investor-attention after recording a stunning 234% increase in net profit during the first quarter ended March 31, 2019.

Its profits, the company says, are boosted by its poultry farming business, which in turn are the result of continued stable selling prices for eggs and improved production efficiency.

Revenue for the period is up by 30.7% to RM150.52mil, while its earnings per share climb to 7.37 sen from 2.20 sen previously.

Teo Seng, which is among the largest integrated egg producers in the country, produces some four million eggs daily, and has reported impressive financial results in the recent quarters.

Following its results on Thursday, the company’s shares rose eight sen or 6.25% to RM1.36, before shedding four sen yesterday as investors took profit.

Incorporating Teo Seng’s EPS of 7.37 sen in Q1, the stock’s 12 month trailing price earnings multiple came down to 8.4 times, going by Bloomberg data.

So the question, moving forward, is whether the stock is undervalued at its current share price of RM1.32?

This is also in view of its substantial shareholder, and the country’s largest integrated poultry producer, Leong Hup coming back to the market next week with a PE of 15 times - almost double that of Teo Seng.

It is important to note, however, that local poultry stocks have a wide range of valuations.

This has to do with the companies being involved more actively in different segments of the poultry sector, which also makes it difficult to compare them.

For example, there are QL Resources Bhd
image: and Lay Hong Bhd
, which have relatively high PEs, at 49.59 times and 56.18 times respectively.

QL Resources is a diversified, multinational corporation, and is among Asean’s largest egg producers.

It also huge surimi manufacturer (a paste made from fish or other meat), is involved in retail – being the country’s master franchisee of the highly successful FamilyMart convenience store – and is also building a presence in the sustainable palm oil sector with activities including milling, plantations and biomass clean energy.

Observers, however, also say that both QL and Lay Hong are stocks that are tightly held or “cornered”, resulting in their higher values.

Lay Hong, on the other hand, is another big player which is involved in many segments of the sector, including the mass production of fresh table and specialty chicken eggs, liquid egg, chilled and frozen dressed chicken, chicken parts and processed related chicken products.

Another poultry player, CAB Cakaran Corp Bhd
image:, trades at 14.89 times, which is similar to the valuation at which Leong Hup is coming in to the market at next week.

And there is LTKM Bhd
image:, also primarily an egg producer, which trades at a value closer to Teo Seng, at 10.03 times.

Looking overseas, there is also an Indonesian poultry player called Japfa Comfeed Indonesia, which has a business quite similar to Teo Seng, and also trades at almost the same PE – at 8.40 times.

In contrast to QL and Lay Hong, which are more diversified, international and thus, at the “higher end” of the PE valuations, Teo Seng is primarily an egg producer and more of a local player. It exports 40% its daily egg production to Singapore and Hong Kong.

There is the upcoming relisting of Leong Hup, which indirectly owns 53.7% of Teo Seng, according to its recent annual report.

Will this, by association, boost Teo Seng?

The view is mixed. Some observers think the Leong Hup IPO could lend support to stronger buying interest in Teo Seng, especially after its solid first quarter and relatively low valuation at present.

Others differ. They reckon that Leong Hup will always trade at a higher PE multiple than companies like Teo Seng due to the latter’s breadth and depth of its business.

Leong Hup is a regional corporation, involved in many segments apart from egg production.

“It is a different game altogether,” says a person familiar with the industry.

Looking back at Teo Seng’s financial performance, the company has done well in the recent quarters, in line with stable egg prices.

Prior to that, the company’s performance was hit, along with other egg producers, when selling prices of eggs were low.

One of the major costs for poultry players is feedstock, and as they mainly import in US dollars, these companies are hit when the ringgit weakens.

“When the ringgit appreciates, poultry players gain, as their cost is lower.

“However, the ringgit has been down since January, so it remains to be seen whether the strong earnings recorded in recent quarters will continue in the upcoming quarters,” he said.

The impact of the weaker ringgit on poultry players has been mitigated by stable egg prices, for now.

It is also worth noting that, being part of the agriculture industry, the poultry sector is seen as “recession-proof” as it involves food security, and the demand will always be there.

Moving forward, factors like the cost of feedstock, the strength of the ringgit and the selling price of eggs will continue to be crucial in determining how Teo Seng performs.


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