AmWatch - Teo Seng Capital : An undervalued consumer staple BUY, 11 Mar 2015

STOCK FOCUS OF THE DAY

Teo Seng Capital : An undervalued consumer staple        BUY

We initiate coverage on Teo Seng Capital Bhd (TSC) with a BUY and a fair value of RM2.40/share, based on a fully-diluted PE of 13x on FY15F earnings. TSC is a Shariah-compliant stock. TSC is a well-managed modern poultry farmer focusing primarily on the production of eggs. With a daily output of 3.1mil eggs, it is the third largest egg producer in Malaysia. About one-third of its production is exported to Singapore.

Our investment thesis is built around five key factors:- (i) Favourable industry dynamics with stable growth of 3%-5% p.a.; (ii) As part of regional poultry giant Leong Hup (LH), TSC has first pick of the top layer breeds, which ensures the quality of its eggs. TSC’s earnings CAGR of 35% over the last three years is a testament to its management expertise; (iii) Based on FY15F’s earnings of RM61mil, TSC is trading at an attractive PE of 11x, versus the average consumer sector’s PE of 18x. Its high ROE of 23% also stands out;

(iv) Robust earnings growth: We forecast earnings to expand by 16%-26% over FY15F-FY17F, underpinned by production capacity expansion (+400,000 eggs/day p.a. to 5.1mil eggs/day in five years) and steady demand growth. Operating margins are expected to remain intact at about 20%, thanks to soft commodity prices. The addition of biogas plants would also help lower operating costs. (v) Expanding dividend payout: Capex of RM70mil would peak in this fiscal year, and thereafter normalise to RM25mil p.a. Given its steady average FCF of RM50mil over FY15F-FY17F and an under-geared balance sheet (net gearing: 24% but would revert to net cash in FY16F), management is targeting to raise its dividend payout from its historical rate of ~20% to 35% within the next three years.

TSC lacks an institutional following as it is presently under-researched. We believe that this would change given improved corporate access, steady earnings and dividend track record.

Others :

Benalec : Unlocking land value   BUY

Jaya Tiasa Holdings:Timely boost from Rimbunan Hijau’s proposed refinery         BUY

Berjaya Food : 9M below expectations despite full consolidation of Starbucks     HOLD

Plantation Sector : Weak exports in February      NEUTRAL

NEWS HIGHLIGHTS

Malaysia Airports Holdings : Arrivals hit 8.2 million passengers

AirAsia : Expands connectivity to India, Indonesia with 3 new routes

Energy Sector : New power deals