Investors unexcited about poultry measures

Stocks receive muted reaction due to ongoing uncertainty

PETALING JAYA: Poultry stocks saw muted response from investors following wide-changing measures that will see chicken exports from Malaysia being banned from June 1 and the market flooded with imports following the abolishment of approved permits to bring in more chicken.

Experts reckoned that poultry stocks would continue to face muted market reaction from investors in the near term due to a margin squeeze from the ceiling price and rising global food cost.

Since Feb 5, the ceiling price of standard chicken has been fixed at RM8.90 per kg and the government has allocated Rm729.43mil in subsidies through the Malaysian Family price control scheme to maintain the price.

Rakuten Trade head of equity sales Vincent Lau told Starbiz that the export ban would be another bane for poultry stocks, especially those that have the majority of chicken produced exported.

“I foresee selling pressure to continue in the short term due to rising feed prices. There will be lacklustre response in the market as the outlook of the sector is uncertain,” he added.

However, Lau noted that it depended on how long the ban will be imposed and the proportion of chicken exported for the companies.

“But, in my view, the new ruling is a temporary measure.

“The share price performance will recover when policy rules normalise,” he quipped.

At the close yesterday, the largest integrated producer of poultry, eggs and livestock feed in South-east Asia, Leong Hup International Bhd (LHI), was down two sen to 50.5 sen.

Poultry company Lay Hong Bhd was flat at 22.50 sen and Teo Seng Capital Bhd and LTKM Bhd were also flat at 80 sen and RM1.32, respectively.

The government has banned the export of 3.6 million chickens a month from June 1 until the price and supply of chicken stabilise in Malaysia.

Former fund manager Scott Lim believes there will not be a dramatic effect on the share price performance of poultry companies, as investors do not have huge expectations on the earnings performance of the companies because of the price control mechanism and rising input cost issues.

“There will be muted reaction from the market, which could possibly last for the next six months at least due to producers facing cost pressures, while the government continues to control the industry heavily with regards to the fixed ceiling price of chicken.

“There is no reason for this new export ban and fixed ceiling price to be lifted any time soon,” Lim, who is the founding partner of Omni Capital Partners Sdn Bhd, said.

As such, Lim believes that investors are not excited about the poultry industry, which is reflected in the low volume of shares traded over the last 12 months of the listed companies.

That said, RHB Investment Bank regional sector head Soong Wei Siang pointed out that LHI’S sales would be affected by the implementation of the export ban, as poultry exported to Singapore accounted for 11% of the group’s financial year ended Dec 31, 2021 (FY21) sales.

Citing another company, QL Resources Bhd, which is under its coverage with exposure to the poultry business, he said it would not be impacted because the group’s poultry sales are fully domestic-driven.

“Hence, the group will have no direct impact from the expected export ban,” said Soong.

On a positive note, he conceded that the export ban is anticipated to be able to alleviate the chicken shortage situation in the near term, with chicken supply initially catered to the export markets re-channelled to the domestic market.

Nonetheless, an analyst said the export ban on chicken would be generally negative to the listed poultry players, as they could incur serious long-term consequences, leading to overseas customers diversifying away from Malaysian suppliers to reduce the risk of supply disruptions in the future.

“While I understand the government’s decision to clamp down on the chicken cartels that are controlling the market price, more consideration should be given before resulting in a big change in policy as it might backfire.

“If the input costs continue to be higher than the ceiling price and the subsidies, with no export option, then small farmers might face a cash crunch and lead to a further decrease in the supply of chicken,” explained the analyst.

Malaysian Institute of Economic Research head of research Shankaran Nambiar said poultry producers may choose to reduce production should the export of chicken yield a higher margin than selling in the domestic market.

“If they are getting lower margins in the local market, they may prefer to cut production. The government will not quite be able to ensure that all the chicken that is produced would reach the market.

“It cannot be said with any certainty if the restriction on exports will be effective.

“This may work if the government steps in to buy the chicken, and that too, at a satisfactorily high price,” he elaborates.

Alongside these new measures, Nambiar suggested the government look into encouraging chicken breeders to produce more output by relaxing the cost of credit for farmers.

“Long-term measures are necessary, so the government could also encourage individuals to get into the production of agricultural and poultry products,” he said.

“I foresee selling pressure to continue in the short term due to rising feed prices.”

Vincent Lau