Poultry Theme Catching Fire

Poultry Theme Catching Fire

Furniture stocks and wood related stocks are having a good run, thanks to weakened oil prices, more so by a listless ringgit, topped off by a drastic drop in the price of rubber wood for the last 18 months (which is expected to lasts for another 12 months at the very least).

In a market that is in dire shortage of stocks to trade and ideas to foment on, poultry theme is gaining traction. The spectacular results by Teo Seng made the smarter punters to take notice. 

StarBiz did a good industry coverage over the weekend:  " ... 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. .... "

The one I like the best is CAB Cakaran. CAB Cakaran Corp Bhd (CAB). Unlike PW which operates its broiler farming business only in the north, CAB has farms throughout the Peninsular. It has a larger capacity of 3.6m birds/month currently and RM670m annual turnover compared to PW’s 2m birds/month capacity and RM250m annual turnover. In addition, CAB has transformed in the past 2-3 years, gaining in terms of stock price as well as improved earnings profiles since the second generation took over the helm.

Currently, CAB has 10 breeder farms and 117 broiler farms throughout the Peninsular Malaysia.  CAB is also involved in downstream business particularly the value-added food products like cooked chicken and this segment contributes c.6% of group’s topline with profit margin almost double that of the livestock business. Under its supermarket division, CAB currently operates eight outlets under the brandname of Jaya Garing mainly in East Coast. Despite making up less than 20% group’s revenue, earnings contribution from this segment is still insignificant at the moment. 

The recent acquisition of 51% stake worth SGD7.4m in Tong Huat Poultry Processing Factory Pte Ltd (TH), which was announced in last October will gain an immediate presence in Singapore as TH is one of the seven licensed slaughter houses there with market share of 15%. Upon completion of the acquisition which is expected in April, TH would add another capacity of 550k-600k birds/month to CAB capacity. In addition, CAB will spend RM10m-RM20m capex this year to expand its breeder farms in Juru, Penang and Padang Meha, Kedah. With the acquisition and expansion plans, CAB is able to achieve 5m birds/month capacity by year-end.

CAB has been acquiring parcels of lands mainly in Mainland Penang, such as Bukit Mertajam and Batu Kawan, more than 20 years ago with the purpose for farming expansion. However, with the rapid development in Mainland Penang, today these lands are no longer suitable for farming activities as there are close to housing estates, which may cause environmental issue. As such, CAB is now considering ways to unlock these lands value either through sale of land or to embark on property development via JV. In its latest FY14 Annual Report, a total of RM64.8m worth of investment properties were reported of which half are vacant land while the rest are being leased out.

CAB is trading around CY15 9x PER which is at a 10% discount to the FBMSC’s valuation of 10x. The earnings growth is to be driven by: (i) the new acquisition of Singapore-based Tong Huat Poultry Processing Factory Pte Ltd, and (ii) expansion of existing farms in Juru, Penang and Padang Meha, Kedah. As such, its monthly capacity is set to reach 5m birds by this year-end from 3.6m birds currently. 

I expect further consolidation in the sector. The grapevine has it that Chia of QL Resources has tentatively agreed to sell back QL's stake in Lay Hong back to the owners after a protracted struggle. Knowing Mr. Chia, he wants to control as much as the upstream and downstream of any industry he ventures into. I would expect QL to show strong interest in picking up some sort of interest in an eggs producer and/or poultry stock.

I see an immediate target of RM1.35 for CAN Cakaran by June 2015.

PICS: Urassaya Sperbund

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though).  The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. I may already have shares in the above mentioned stock/s. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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