Boon from lower commodity prices


  • Business
  • Saturday, 07 Mar 2015

IN the past, poultry stocks had been mainly defined by low margins and volatile pricing to the extent that serious investors hardly looked beyond the big names.

But that is slowly changing – thanks to the low commodity prices that allow poultry operators the advantage of having cheaper feedstocks and the consistent demand for chicken and eggs irrespective of the state of the economy.

Some of the mid-cap poultry stocks have one thing in common – most have huge revenues of a few hundred million ringgit.

The rising topline over the last few quarters is due to acquisitions or diversifications, which have led to larger sales volumes.

This has caused the earnings of the poultry companies to spike, despite their single-digit margins.

Thus, while there are about 3,200 broiler farms producing some 660 million birds last year, observers note that the number of farm companies have been reducing, while the capacity of the companies increases.

Another interesting fact is that all the companies are tightly held by the major shareholders - an average of 50% of the shares are held by the controlling shareholders.

In the case of Teo Seng Capital Bhd, 53% is held by the major shareholder, while the majority stake held in PW Consolidated Bhd is 49.95%. The major shareholder of LTKM Bhd holds 61% of the company, and in CAB Cakaran Corp Bhd, the major shareholder controls 54%.

A clear key trend is that poultry companies which export chicken meat and eggs enjoy significantly better margins. Out of the 660 million birds last year, 6% of the live birds were exported – mostly to Singapore – where margins are a lot more stable.

Poultry companies which have exposure in Singapore include the unlisted Leong Hup Holdings Sdn Bhd, which has four licensed slaughter houses in Singapore.

Teo Seng, which exports to Singapore has increase significantly in the last few years, had seen its share price soar 38% on a year-to-date basis at its current price of RM1.68.

Teo Seng’s revenue contribution from Singapore has increased some 100% to RM90.44mil in 2013 from RM44.83mil in 2012. LTKM exports its eggs to Singapore and Hong Kong.

CAB Cakaran is about to make its entry into Singapore.

Last October, it entered into a heads of agreement to acquire a 51% stake in Tong Huat Poultry Processing Factory Pte Ltd for RM19.2mil. Tong Huat is one of seven licensed chicken slaughtering houses in Singapore.

The proposed acquisition would be completed by the second quarter of this year, and would add some S$1.02mil (RM2.75mil) to CAB Cakaran’s full-year bottom-line in financial year 2016. The additional RM2.75mil would be a 24.66% increase in CAB Cakaran’s 2014 earnings. The company recorded a net profit of RM11.17mil for its financial year ended Sept 30, 2014.

“The poultry stocks have always traded at single-digit price earnings because of the earnings volatility. This is mainly due to the volatility both in the feedstock as well as the market price of eggs and chicken,” explains one consumer analyst.

Sixty-five per cent of a poultry company’s production cost is made up of the feed cost - which is soybean meal and corn.

For now, the price of soybean and corn is expected to remain low, although this is slightly mitigated by the depreciation of the ringgit.

Looking forward, the poultry players are expected to deliver stronger results due to the improved pricing of chicken, which has stabilised to the RM5 per-kg-level from RM3.50 per kg in the fourth quarter of 2014. The stable feed price of corn and soybean is another factor.

Currently, 90% of production takes place in Peninsular Malaysia, with the rest in Sabah and Sarawak. In terms of bird numbers, commercially bred broilers comprise 65% to 70%, while layers make up 25% and breeders make up about 5% to 8% of the total.

The shareholder tussle between integrated poultry players QL Resources Bhd and Lay Hong Bhd has also contributed to the interest in poultry stocks.

Lay Hong has seen its public shareholding spread shrink to just 15%, as rival QL continues to buy the former’s shares in the open market.

Recently, Lay Hong proposed to place out as much as 30% of the company’s shares.

The proposed placement of Lay Hong’s shares has come under scrutiny because of the shareholder tussle between QL and the Yap family, who are also the founding family of Lay Hong.

This proposed corporate exercise could effectively reduce the Yap family’s stake in Lay Hong and dilute QL’s stake in Lay Hong to about 21% from 39% currently.

The Yap family currently owns about 44.5% of Lay Hong, of which, 37.32% is via private vehicle Innofarm Sdn Bhd.

Earnings for both QL and Lay Hong had risen during the recent quarterly earnings.

Lay Hong’s net profit surged to RM6.3mil in the third quarter ended Dec 31, from RM1.05mil a year earlier. Revenue for the quarter jumped 21.33% to RM177.15mil from RM146mil previously.

Meanwhile, QL’s third-quarter net profit to Dec 31, 2014 rose 24.67% to RM55.62mil on the back of a 10.09% increase in revenue to RM732.82mil.

Higher poultry prices and stable raw material prices were among the reasons given for the better results.

Below are some of the mid-cap poultry stocks.

CAB Cakaran Corp Bhd

CAB Cakaran is one of the biggest poultry companies in Malaysia. It is one of the rare companies that saw its share price double in 2014. On a year-to-date basis, the stock is up 30.6%, taking into account the bonus issue of warrants.

The company will start to give out dividends next year. It is presently trading at a historical PE ratio of 10 times and at a price-to-book value (P/BV) of 0.87 times.

Both CAB Cakaran and PW Consolidated are based in the north, although CAB Cakaran has farms throughout the Peninsula.

CAB Cakaran has a capacity of 3.6 million birds per month currently and an annual turnover of RM670mil. The company is looking to increase its capacity to five million birds a month by year-end.

It has 10 breeder farms and 117 broiler farms in Peninsular Malaysia. It is also involved in the downstream business, particularly value-added food products like cooked chicken.

PW Consolidated Bhd

WHILE it presently does not have an export market, PW Consolidated’s growth story comes from its layer business. Currently, the group has broiler farming businesses in Penang, Perak and Kedah, with a capacity of two million birds a month.

The stock is now trading at a historical PE of 8.72 times and a P/BV of 0.36 times.

It also operates one of the country’s largest feed mills in Bukit Minyak, Penang, with an installed capacity of about 21 tonnes a month, marketed under the NUTRIFEEDS trademark.

LTKM Bhd

LTKM has one of the strongest balance sheets of all the poultry companies. While most of the other poultry companies are relatively highly geared, LTKM had borrowings of RM6.4mil as at Dec 31, 2014 against cash of RM33.56mil.

Based in Malacca, LTKM is the largest layer farm in Malaysia, with a current capacity of 1.4 million eggs per day.

Its sells the Omega-3 eggs under the LTK Omega Plus brand.


Related stories:
Francis Lau on chicken and eggs
Teo Seng allocates RM200mil to grow capacity


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