Teo Seng forecast to sustain earnings growth

Higher production capacity for eggs to help bottom line

“We raise our previous FY23, FY24 and FY25 core net profit forecasts by 50.9%, 93.5% and 35.8%, respectively, mainly to account for higher subsidies for eggs, lower production cost assumption for eggs, and higher earnings before interest and tax margin assumption for animal health products.”

Hong Leong Investment Bank Research

Teo Seng Capital Bhd is expected to see its strong earnings momentum continue into the next few quarters on higher production capacity for eggs as well as recognition of subsidies for eggs.

According to Hong Leong Investment Bank (HLIB) Research, healthy growth prospects for animal health products will also help sustain the poultry company’s bottom line over the medium term.

The brokerage valued Teo Seng’s shares at RM2.43 apiece, up from its earlier fair value target of RM1.31, following an upward revision in net profit forecasts.

The latest fair value was based on six times the revised core earnings per share forecast of 40.5 sen for the financial year ending Dec 31, 2024 (FY24).

“We raise our previous FY23, FY24 and FY25 core net profit forecasts by 50.9%, 93.5% and 35.8%, respectively, mainly to account for higher subsidies for eggs, lower production cost assumption for eggs, and higher earnings before interest and tax margin assumption for animal health products,” HLIB Research said.

HLIB Research said its forecasts incorporated the assumption that government subsidies for eggs would remain until the end of the first half of 2024 (1H24).

“We believe Teo Seng’s strong earnings momentum will sustain into the next few quarters, underpinned by higher production capacity for eggs, recognition of subsidies for eggs and healthy growth prospects for animal health products,” it said.

HLIB Research noted that Teo Seng had expanded its daily eggs production capacity from four million to 4.2 million since the third quarter of 2023.

It said based on its understanding, only five months’ worth of subsidies were recognised during the first nine months of 2023 and the delay in subsidy recognition was due mainly to teething issues from the new system implementation.

“With the teething issue being resolved since mid-fy23, we believe Teo Seng will able to recognise the remainder of FY23 subsidies over the next two quarters,” HLIB Research said.

It added that the growing trend of pet humanisation, rising ecommerce trends and Teo Seng’s relentless efforts in expanding its distribution brands were expected to support the growth of the company’s animal health products segment.

Meanwhile, HLIB Research said it expected egg prices to stay high post price ceiling and subsidy removal.

“Although subsidies and price ceilings for eggs will not sustain indefinitely, we take the view that both will remain until end-1h24 (in line with the government’s interest to ensure supply of eggs at stable prices during major festive seasons),” it said.

“We believe prices of table eggs, which accounts for 60% to 70% of Teo Seng’s total egg production volume, will likely remain at elevated level even if the government decides to float prices of table eggs.

“Egg production cost, particularly among the small-scale producers, which accounted for around 40% of total industry volume in FY21, will continue to stay high on the back of elevated feed prices and minimum wage hike since May 2022),” it added.

Over the longer-term, HLIB Research said further expansion in Teo Seng’s egg production capacity and expansion of downstream product range would support earnings stability.