Poultry stocks in a sweet spot as feed costs cool

Poultry stocks in a sweet spot as feed costs cool

This article first appeared in The Edge Malaysia Weekly on July 29, 2024 - August 4, 2024

POULTRY stocks have been trading higher, with some reaching multi-year highs in recent weeks. This rally could continue as earnings are expected to improve, analysts say.

The better outlook could be due to lower input costs for chicken feed as the prices of soybean meal and corn have fallen to their lowest levels since late 2020, thus contributing to the margin expansion of poultry players.

“I think poultry stocks still have legs, being in the consumer segment,” says Loui Low Ley Yee, head of research at Malacca Securities Sdn Bhd. “Hence, there should be more upside to earnings going forward.”

CCK Consolidated Holdings Bhd (KL:CCK) and QL Resources Bhd (KL:QL) have seen multiple year-highs in recent weeks, while Lay Hong Bhd (KL:LAYHONG), CAB Cakaran Corporation Bhd (KL:CAB), Leong Hup International Bhd (KL:LHI) and Teo Seng Capital Bhd (KL:TEOSENG) hit theirs earlier this year, before coming off their peaks.

CCK reached RM1.70 per share on June 13 — its highest ever — while QL’s peak of RM6.81 on July 11 was its highest since Oct 14, 2020 when it was trading at RM6.98. Meanwhile, Lay Hong closed at 46.7 sen on May 21, its highest since Nov 22, 2019.

Other than QL, Teo Seng hit its highest level of RM2.43 on Feb 21, while CAB closed at 82.9 sen on Feb 27 — its highest point since Oct 2, 2018.

Leong Hup achieved 72.9 sen on Feb 26, its highest since March 11, 2021, when it was trading at 73.4 sen apiece.

These counters have been enjoying a good run over the last year with CCK leading the pack, with its share price more than doubling to RM1.70, followed by Teo Seng whose share price appreciated more than 84%. The other poultry counters — QL, Lay Hong, Leong Hup and CAB — have not done badly either.

Low of Malacca Securities cites decent valuations as the underlying reason for the upward trend in poultry stocks.

“I think there is still value [in poultry stocks] due to their low PER [price-earnings ratio],” he tells The Edge, referring to those counters that are trading at low single digit PERs, such as Leong Hup, Lay Hong, CAB and Teo Seng.

Based on its closing price of 65 sen last Thursday, Leong Hup was trading at trailing 12-month (TTM) PERs of 7.06 times and forward PERs of 8.67 times. Meanwhile, its listed subsidiary Teo Seng, in which Leong Hup has 55.73% interest, was trading at a TTM PER of 3.35 times.

There is only one analyst coverage on Teo Seng (see table). However, there’s no earnings forecast for the company, assuming it maintains its performance in its first quarter ended March 31, 2024 (1QFY2024), for which it reported an earnings per share (EPS) of 11.59 sen, the company could make about 46.36 sen for the full year. This would work out to a forward PER of 4.12 times, based on its closing price of RM1.91 last Thursday.

Meanwhile, Lay Hong is trading at a TTM PER and forward PER of 3.14 times and 2.63 times compared with CAB’s 5.75 times and 8.6 times. There are no analysts covering either of these companies too.

It is noteworthy that the poultry business is not one that warrants high PERs as it is a highly regulated industry where prices are often controlled by the government. Furthermore, it is dependent on the international market for animal feed.

Among the counters covered in this story, QL is valued at a double-digit multiple PER. However, QL is not a pure poultry play — it is an integrated agro-based business group, with interests in livestock farming, marine products manufacturing, oil palm plantations and convenience store operations.

At its closing price of RM6.61 on July 25, QL was trading at TTM and forward PERs of 36.74 times and 35.54 times respectively, according to Bloomberg.

MIDF Research has a target price of RM7.25 on QL and a core FY2025 forecast EPS of 22.3 sen. This gives the group a forward PER multiple of 32.5 times.

“We like QL’s commitment to being the market leader in various business ventures and its diversified revenue base spanning horizontally and vertically across four divisions and geographical regions.

“We remain positive about the convenience store chain (CVS) segment’s revenue growth momentum, buoyed by new outlet openings and better consumer sentiment (supported by an improving job market and progressive wage hikes ahead),” states MIDF Research in a June 6 note.

The research firm opines that the marine products and integrated livestock segments of QL are poised to remain solid, supported by sustained demand for poultry products and soaring demand for seafood products.

“I believe poultry companies with a good business model (vertical integration strategy) will thrive. Merely upstream operators may not interest investors at this point,” says Vincent Khoo, director of strategy at UOB Kay Hian Securities (M) Sdn Bhd.

This could explain QL’s high PER.

Its smaller Sarawak-based peer, CCK, is trading at a TTM PER of 11.01 times and forward PER of 11.7 times.

Apex Securities has a target price of RM1.48 on CCK, pegged at a multiple of 10.6 times FY2025 forecast EPS of 14 sen, while Public Invest Research has ascribed a PER multiple of nine times to FY2025 forecast EPS of 13.4 sen, for a target price of RM1.20.

Maybank Investment Bank has a “buy” call on Leong Hup with a target price of 75 sen, which is pegged at 11 times FY2024 estimated EPS.

The target price was lowered from 93 sen per share as Maybank IB slashed its earnings forecast for Leong Hup for FY2024, FY2025 and FY2026, as well as ascribed a lower PER multiple, from the previous 13 times.

“Factoring in current feedmill segment run rates, we reduce our FY24E/ FY25E/FY26E earnings estimates by -15%/-14%/-13%. We understand that domestic poultry average selling prices (broiler and day-old chick) have normalised but sales volume should remain relatively stable in sequential quarters given balanced supply and demand.

“Improving poultry ASPs in Indonesia, Vietnam and the Philippines may also support Leong Hup’s earnings growth going forward. Feedmill margins, on the other hand, could ease further as Leong Hup gradually passes on feed raw material cost savings to its customers,” states Maybank IB in a May 31 note.

The lower earnings estimates were due to the company’s first quarter ended March 31, 2024 (1QFY2024) results, which undershot Maybank IB’s expectations. Leong Hup reported a net profit of RM56.6 million for the quarter, which was 21% of Maybank IB’s and consensus full-year earnings estimates.

Leong Hup claims to be the largest fully integrated poultry producer in Malaysia, with operations that cover the full spectrum of the poultry supply chain, from feed milling, breeding of poultry stock, production of broiler chickens, food processing production and quick service restaurants.

Apart from its shareholding in Teo Seng, Leong Hup also owns 57.3% of PT Malindo Feedmill tbk, an Indonesian integrated poultry producer listed on the Indonesia Stock Exchange, besides operations in the Philippines and Vietnam.
Management of margins essential

The prices of raw materials for chicken feed, such as corn and soybean meal have declined substantially over the past year. As at July 24, corn futures traded on the Chicago Board of Trade had declined by 21.24% to 416.25 US cents per bushel. The price of soybean meal has also fallen by 14.16% over the last year to US$317.7 per tonne.

On the domestic front, the government’s move to lower the price of chicken eggs by three sen each in June may also have contributed to the positive outlook for poultry stocks.

On June 18, Prime Minister Datuk Seri Anwar Ibrahim announced that the price of eggs will be reduced by three sen each, involving a subsidy of 10 sen per egg, for a total allocation of RM100 million.

In 2023, the government allocated RM927 million for egg subsidies.

With the subsidies, poultry players have been able to expand their margins as the prices of the main raw materials for chicken feed have also dropped over the last year. This can be seen in the results for the quarter ended March 31, 2024.

For the quarter, CCK’s net profit increased by 32.23% year on year (y-o-y) to RM21.37 million, as its profit from the poultry segment surged more than 26 times y-o-y. The much better performance of the poultry segment was due to effective cost-control measures, a strategic alignment of the product mix and a favourable movement in feed input costs.

“Despite CCK’s ineligibility for tax incentives in Budget 2024, egg subsidies remained in place. While headline PBT fell 35.3% q-o-q to RM27 million due to a high base effect, gross profit margins improved to 24.0% from 22.9% in the last quarter, driven by robust profitability across all key segments,” says Apex Securities in a June 4 report.

Meanwhile, Lay Hong’s net profit for the quarter more than doubled y-o-y to RM26.73 million, with the profit after tax of its integrated livestock farming segment rising 136.44% y-o-y to RM58.07 million, outstripping the 86.33% jump in revenue.

“Margins will depend on input costs, and so far, input costs have been manageable and not volatile,” says Low of Malacca Securities. “So, they (poultry producers) should be able to control this wisely.”

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