TSC looking better ahead despite volatile egg prices

KUCHING: Analysts from AmResearch Sdn Bhd ( AmResearch) came away from its meeting with Teo Seng Capital Bhd (TSC) assured of its earnings prospects despite its weaker-than-expected 4QFY15 earnings.

“We understand that TSC’s earnings in the last quarter (4QFY15) had been negatively impacted by higher costs, the bulk of which were one-off,” it said.

Among these costs included unrealised forex losses of RM2.7 million in relation to the hedging of its Singapore dollar receipts, negative goodwill of RM2.7 million following its acquisition of BH Fresh Food Pte Ltd (BHFF) factory, increased depreciation, staff costs and start-up expenses in tandem with its capacity expansions as well as the normalisation of its effective tax rate in the absence of the one-off tax incentive from higher exports to Singapore.

While TSC’s overall operating expenses are expected to be higher moving forward on the back of higher depreciation and start-up costs from its expansions, management has guided for net profit margins to remain between 10-12 per cent as these will be offset by favourable feedstock costs and margin enhancements from its biogas plant-ups and external sales of paper egg tray.

Corn and soybean prices are still on a decline, even after accounting for the exchange rate. Compared to 4QFY15, input prices are lower by three to five per cent year to date.

“We understand that TSC has locked-in its supply until Aug 2016,” said the research house.

A key challenge for the group remains the volatile egg prices. A one sen fall in prices translates to an RM1 million per month decline in net profit. Average selling price (ASP) to-date for 1QFY16 is 29sen per egg.

“While demand was strong supported by the festive season, prices were limited by the government’s cap of 27 sen per egg.

“All in, we are keeping our earnings estimates unchanged. TSC’s earnings growth will be underpinned by production capacity expansion of 400,000 eggs per day per annum,” it added.