AmWatch - Teo Seng Capital : Stronger EPS growth momentum from continued feedstock downcycle BUY, 25 Mar 2015

STOCK FOCUS OF THE DAY

Teo Seng Capital : Stronger EPS growth momentum from continued feedstock downcycle            BUY

We reaffirm BUY on Teo Seng Capital (TSC) and raise our fair value from RM2.40/share to RM2.70/share. This is based on an unchanged fully-diluted PE target of 13x FY15F earnings. We came away from the recent meetings we hosted for TSC and institutional funds with a more upbeat view on TSC’s prospects. We have raised our FY15F-FY17F earnings estimates by 9%-15%.

Our earnings upgrade is premised on expected stronger margins moving forward on the back of sustained higher selling prices of eggs and lower production costs. We now anticipate TSC’s FY15F-FY17F EBITDA margins to expand by 2ppts to ~22%. We understand that egg prices, which have been on an upward trend, reached an average peak price of 34 sen/egg in 4QFY14. This was 10% above the historical average of 31 sen/egg. Management believes that prices will remain at the current levels in the next six months given the robust demand.

A key driver for the group over the next few years will be its rising production capacity (+400,000 eggs/day annually to reach 5.1mil eggs/day). This will underpin its aim of growing its market share by 3ppts to 9.6% in Malaysia. Management is confident of achieving this target given that the smaller players, which make up 73% of the market, are exiting due to the absence of successors and high land costs.

TSC aims to raise its market share in Singapore by 12ppts to 28% by FY19F. This is achievable as the local producers’ current total production capacity of 1.2mil will be capped by limited land available for farming activities. TSC’s other competitive advantages include lower cost structure and its farm locations in Johor. Although soft corn and soybean prices will benefit all poultry players, we believe TSC’s superior margins (+8ppts above its peers’ average) will remain intact given its “All-in-All-out” management system and efforts to monetise its waste.

Management confirmed that its dividend payout will rise from 20% to 35% within the next three years – translating to yields of 5% by FY17F. We expect institutionalisation to expand further, underpinned by improving corporate access, robust earnings trajectory and strong dividend track record.

Others :

Gamuda : Multiple re-rating catalysts within sight             BUY

SapuraKencana Petroleum : Weaker 4Q earnings due to changes in depreciation policy  HOLD

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