Thursday, 2 July 2015

Teoseng: A Real Price Concern

There is little doubt that Teoseng is a successfully-run poultry company.

Its revenue and especially net profit, grew by leaps and bounds in the last 2 years.

Its FY14 ROE breaches 30.

It gives great dividends and bonus issue.

It has a 5-year plan to increase its chicken egg production capacity by 60% from 3.2 mil/day to 5.1 mil/day.

It plans to increase its export to Singapore from 30% to 40%.

Its first of five biogas plant to save cost is on track to be completed this year.

It aims to be the largest egg producer in Malaysia in the future.

Despite all these positive notes, Teoseng's share price has been trending down since reaching a height at RM2.20 in end of Mac15 after bonus issue. 

Currently it is trading at slightly above RM1.50 level, and failed to follow the spectacular rebound in KLCI in the past 3 days.

If we annualize FY15Q1's PATAMI of RM17.5mil, its shares are traded at projected PE of only 6.4x, and this company is still in expansion mode.

Why?

Is poultry theme play over?


       Teoseng share price in 2015


How did Teoseng achieve such an impressive financial result lately? Its net profit jumps 180% in just 2 years.

Though Teoseng has several businesses such as poultry farming (layer), trading of animal health products, manufacturing of paper egg trays & poultry feeds, its poultry farming contributes 90% of its bottom line in FY14.

So, the vast improvement in its earning should be related to its poultry farming segment.

I'm not sure how much has Teoseng expanded its layer farms between 2012-2014. Increased egg production capacity will certainly contribute directly to its revenue and profit.

I feel that there should be some expansion but perhaps not that much.

So, the improvement in financial performance in the last 2 years should be largely due to lower material cost and higher egg selling price.

Feeds (corn/soybean) make up about 70% of layer farming's cost. From 2012 to 2014, corn price fell by more than 50%. Surely low feeds price has raised Teoseng bottomline significantly.



Though corn & soybean price rebound in June15, they are expected to stay low due to increased harvest in North & South America.





Has recent sharp rebound in corn & soybean price affected investors' sentiment in Teoseng? I don't know.

Another potential culprit might be chicken egg price.

Teoseng currently produces about 3.2 million eggs per day. If egg price increases by 1sen, its revenue will potentially increase by RM32,000 a day, or RM2.88mil in a quarter.

If other cost & parameters remain the same, this extra RM2.88mil a quarter will go towards its PBT.

In other words, if egg price increases by 1sen, Teoseng can potentially earn RM2.88mil more in its pre-tax profit.

But if egg price drops 1sen, then Teoseng may potentially earn RM2.88mil less.

If egg price drop by 10sen, does it mean that Teoseng's profit will potentially drop RM28.8mil in a quarter which will throw it into loss???

Of course things are not that straight forward. Egg price fluctuates every few days and there are many other reasons that can affect its profit.

To check our country's egg price, I found a website that records Malaysia's historical chicken egg price, by Department of Veterinary Services.

If you study the price trend, there seems to be a rather significant drop in egg price since Mac15.


       Malaysia Chicken Egg Price in 2015


The line chart below shows monthly Grade A chicken egg price since year 2013. Since there are a few data in each month, I will pick the price closest to middle of the month to represent that month.


       Grade A Egg Price Chart 2013-2015


Grade A chicken egg price hit new high at 39sen in Nov14 and then 41sen in Dec14 and Jan15 before returning to 38-39sen in Feb/Mac15.

This coincides with significant jump in revenue and profit for Teoseng in FY14Q4 and FY15Q1.



However, in second quarter of 2015, grade A chicken egg price falls to 32-35 level. In average it is about 5sen lower than first quarter of 2015.

How do you think it will affect Teoseng's FY15Q2 earning?




Egg price is like CPO price, which will have direct impact on a company's top & bottom lines compared to other commodities used as raw materials.

It's a norm that egg price will fluctuate. Nevertheless, due to inflation, it is expected that egg price will trend upwards with time.

Many years ago, grade A eggs may be sold at 10-20sen, now it's 30-40sen, in the near future it might be 40-50sen.

I believe that current selling pressure on Teoseng's shares is mainly because of declining egg price, and to a certain extent, fear of bottoming out of feed price.

As Q2 is already over, I suspect that Teoseng's FY15Q2 result will not be as good as its latest 2 quarters.

If egg price continue to stay at Q2 2015 level for the rest of the year, then all layer farming operators should see poorer FY15 compared to FY14.

Is this part of the reason Teoseng put its Sungai Linggui expansion plan on hold?

As I have mentioned earlier, I think Teoseng is still a well-managed company who has no control over commodity price. 

With its ambitious expansion plan, shareholders should get the reward in long term.

Who knows grade A egg price will suddenly go above 40sen in second half of 2015?

22 comments:

  1. there is many external factor will affect Teoseng profit in short term. nice and sound analysis, thanks for sharing

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    Replies
    1. Thanks. Just wonder how will its FY15Q2 results like...

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  2. Good analysis.

    I think TEOSENG was mainly overvalued when it was above 2.00. I guess that TEOSENG is "normalizing" its price to a fair level. The fair level can be around 1.7

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  3. During the past CNY, my uncle, who running a chicken farm, told me that egg is oversupply. so I think protein industry is normalizing now.

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    Replies
    1. Thanks Mr Chong. Your uncle has warned about falling egg price. It's good to have "experts" opinion within their fields.

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  4. Very detailed and comprehensive analysis, another good piece of work, thanks for sharing!

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  5. thanks for the analysis. Very useful! I'm one of the share holders of TEOSENG too.

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  6. Thanks for the helpful analysis!

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    1. Thank you for the detailed analysis. Every crisis there is an opportunity. Share price has reflected the low eggs price and slightly higher corn and soya price.
      As 40% of the the eggs are sold to Singapore, how could we get Singapore AVA's eggs price?

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    2. Thanks kcwong. I can't get S'pore historical egg price. I think that their egg price will follow M'sia price closely, as I guess almost all are imported from M'sia. Pls correct me if I'm wrong.

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  7. Replies
    1. Thanks Mr Er. You do great analysis :)

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  8. I really like your blog; the analysis is simply straightforward and easy understand. :)

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    Replies
    1. Hi Michael. Thanks for your encouragement :)

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  9. BD, 1 year down the road, your analysis is still gold. I just cut my LTKM after another surge in soybean price. If only I heed your warning earlier.

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    http://www.focusmalaysia.my/Mainstream/Egg%20players%E2%80%99%20margins%20start%20to%20crack?

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    Replies
    1. Thanks for your update. Looks like it's over for poultry stocks?

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  10. Hi what do u think about poultry industry in mid 2017. egg price has gone to a new low. is it a good entry time

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