‘Egg-citement’ in poultry stocks

 

POULTRY stocks have been off the radar of investors for a few years now, as the egg farming industry has suffered from outbreaks of the bird flu, volatile earnings and an oversupply of eggs.

The industry’s tough operating environment has resulted in investors shying away from these stocks for their unexciting prospects.

Integrated poultry farmer Lay Hong Bhd made a net loss of RM17.79mil in the financial year ended March 31, 2013 (FY13) as a result of a spike in raw material prices due to a drought in the United States, which had impacted the corn and soybean crops.

It subsequently made a profit of RM7.16mil in FY14, as the company gained from the moderation in raw material prices, which account for some 70% of its operational cost, as well as a higher contribution from its processed chicken products business.

Poultry stocks have been quiet for the past three years, but have sparked back to life. There has been an uptrend in these counters of late, as they start to benefit from lower raw material prices that have boosted the prospects of profitability.

Malaysians are among the largest consumers of chicken meat and eggs in the world, averaging 40kg of chicken meat and 320 eggs per person per annum.

This is also supported by a growing population that could push the demand for protein, which the chicken meat and eggs provide.

With the view of the poultry industry making a strong comeback with better profits, QL Resources Bhd is tapping into such growth opportunities with its recent announcement to take over Lay Hong.

Interestingly, after QL launched a takeover offer of Lay Hong on Wednesday, the share prices of other egg producers have also headed up. On Thursday, LTKM Bhd, CAB Cakaran Corp Bhd and Teo Seng Capital Bhd closed at record prices.

Shares of LTKM rose 24 sen to RM4.90, CAB Cakaran ended up seven sen to RM1.02 and Teo Seng gained three sen to RM2.35.

QL is offering to take over Lay Hong at RM3.50 per share, which is a 60% premium over Lay Hong’s peer average of 15 times, analysts say.

Analysts concur that investors are looking at the other poultry stocks that have lower valuations such as LTKM to go in line with valuations set by QL to take over Lay Hong.

Currently, Farm’s Best Bhd is trading at 12.79 times earnings, Huat Lai Resources Bhd (7.59 times), Teo Seng (15.22 times), CAB Cakaran (8.86 times) and LTKM (7.16 times).

Farm’s Best is subject to an RM380mil reverse takeover (RTO) by Chinese-owned SHH (M) Holdings Sdn Bhd.

Under the RTO exercise, SHH (M) Holdings would inject its poultry business in China through the RM380mil transaction.

It has also been reported that the animal-feed mill unit of US-owned Cargill Malaysia is keen to buy a controlling stake in CAB Cakaran, of which the two parties are still in talks.

CAB Cakaran also suffered from the high raw material costs of corn and soybean, both raw ingredients in animal feed.

For FY12, CAB Cakaran recorded a net loss of RM3mil before bouncing back to record a net profit of RM11.9mil in FY13.

Feedstock costs account for 65% to 70% of the poultry industry’s production cost.

“If you look at the poultry companies, their earnings are on an uptrend compared with the past couple of years,” says an analyst.

“The margins for chicken meat and eggs are improving, together with lower corn prices, of which we expect the trend to continue in the near term,” he adds.

Corn prices have declined as much as 45% from 2012, while soybean has fallen by 28%.

Poultry companies have also been actively expanding their businesses by venturing into chicken-cased processed foods and exporting eggs to manage their overall margins.