By Stella Goh – Market Data Analyst | 13 March 2020

Overview
Teo Seng Capital Berhad (TEOSENG) is an investment holding company founded in 2006. It is primarily involved in layer farming (the rearing of chickens for eggs production) but has over the years expanded its products and services to include five main categories ie chicken eggs, animal feeds, paper egg trays, organic fermented fertiliser and animal health products. Of the above products, old chickens and manure are by-products of Teo Seng’s layer farming operations.
TEOSENG was initially listed in Bursa’s ACE Market on October 2008 and later transferred to Bursa’s Main Board on August 2009. Over the years, the company has expanded significantly and aggressively from a small farm operation with daily production of 100,000 eggs to its current capacity of 3.50 million eggs per day. All its 25 farms are in Johor operating on the All-In-All-Out (AIAO) system and Closed-House system. These systems are the most internationally recognized systems in layer farming industry which provides advantages in terms of biosecurity and productivity. The company exports approximately 40% of eggs to overseas, mainly to Singapore (30%) and Hong Kong. (Source: Annual Report 2018)
Business Model
TEOSENG’s core business activities principally involved in the production of eggs, manufacturing and trading of paper egg trays for both internal and external sale, production of animal feeds mainly for own layer farming activities as well as production of organic fertilizers by using chicken manure.
The company also specializes in healthcare solutions as the animal health products are essential for growth of livestock and they can be divided into two categories, namely Farm Animal Products and Companion Animal Products. Some examples include anti-parasite, antibiotics, disinfectants, equipment, feed additives, herbal solutions, pesticides, supplements, vaccine and pet food. Thus, TEOSENG in having its own animal health product division enables it to enjoy priority in terms of product supply and knowledge.
Financial Review

TEOSENG has achieved a revenue growth of 15.58% from RM424.209 million in FY2017 to RM490.285 million in FY2018. Based on past 5 years of CAGR, the revenue growth was 8.19%.
The increase in revenue was due to the higher sales from both its poultry farming business as well as its investment and trading business as the results of upgrading farm infrastructure and facilities brought increased production efficiency. (Source: 4th Quarterly Results 2018)

TEOSENG has recorded a RM32.613 million increase in gross profit, translating to a growth of 53.49% from RM60.971 million in FY2017 to RM93.584 million in FY2018. Based on 5 years CAGR, the company’s gross profit has grown 9.69%.
The increase in gross profit was due to the lower cost of feeds, continuous growth in sales of eggs as well as the positive results brought about by the upgrading of farm infrastructure and facilities for better production efficiency. TEOSENG’s brand of premium eggs known as Omega Lutein, enhanced for buyers who require a higher degree of nutrition has been growing in sales and now contributes 2% of the sales volume. Meanwhile, the company’s investment and trading business saw higher gross profit on the back of increasing demand of the existing and new animal health products.

The Profit After Tax (PAT) rose 778.41% from RM3.460 million in FY2017 to RM30.393 million in FY2018. On a CAGR basis, the Profit After Tax (PAT) grew by 5.39% which was in line with the growth in revenue and gross profit.
Cash Flow Statement
The net cash from operating activities has provided a positive cash flow of RM64.825 million in FY2018 as compared to RM6.338 million in FY2017 indicating that the company is healthy and has enough cash to use for business expansion.
The net cash from investing activities in FY2018 (-RM28.089 million) was mainly due to the purchase of property, plant and equipment (PPE). The negative cash flow indicates that the firm is investing in its business for growth. (Source: Annual Report 2018)
The net cash from financing activities in FY2018 (-RM27.832 million) was mainly due to the repayment of hire purchase payables (RM9.377 million), repayment of term loans (RM9.246 million), net movements in banker’s acceptances (RM9.220 million), interest paid (RM8.310 million) and dividend paid (RM1.499 million).
Is the company able to pay back its liabilities?
Based on liquidity ratio calculation, TEOSENG has a current ratio of 1.101 times in FY2018 indicating that the company does not face any liquidity issue as it is capable of paying back its liabilities (RM185.837 million) if any unforeseeable circumstances occur. TEOSENG is able to do so by using current assets such as biological assets, inventories, trade & other receivables, tax recoverable, cash and bank balances amounting to RM204.612 million.
Prospect and Challenges
TEOSENG has signed a memorandum of agreement (MoA) with Solarvest Holdings Berhad to install solar photovoltaic panels (PV) across all its chicken farms and factories. The company said it has earmarked approximately RM13 million for the installations which involve about 4,000 kilowatt-peak (kWp) of electricity output. This renewable energy generated will be used for the daily operations of its facilities and is expected to generate savings to its electricity costs and will positively contribute to the global environment conservation efforts. The move is in line with TEOSENG’s environmental sustainability goals and supports the government’s green energy ambition. (Source: theedgemarkets.com, 21 November 2019)
Despite unforeseeable circumstances such as egg price in Peninsular Malaysia experienced prolonged unattractive market consolidation due to local oversupply situation in the year, the company is confident that they are well-equipped with all the necessary human capital to resolve the issues. TEOSENG is focusing on sustainable earnings growth through continuous innovation and passionate advocacy of their brand, achieving operational excellence and further developing their HR talents and corporate culture. Farm improvements and expansion was always a top priority as it represents the core business for the company. (Source: Annual Report 2018)
The company also is looking to expand its business overseas and is sourcing for the right partners to ensure a seamless entry into new markets by establishing market strategies to capture more market share in both domestic and overseas markets as well as growing their product range to meet the customers’ demand. (Source: Annual Report 2018)
Rating System

Return on Equity (ROE) = Average
Revenue [5 years CAGR] = Average
Net Earnings [5 years CAGR] = Average
Basic Earnings per Share (EPS) [5 years CAGR] = Average
Interest Coverage = Average
Quality of Earnings = Average
Insight
Based on the calculation of Discounted Earnings Model, TEOSENG has an intrinsic value of RM5.844. The current share price of TEOSENG is RM0.94 which makes it an undervalued stock (as at 12 March 2020). TEOSENG has a beta of 0.958 (500 days) indicating that the share price is less volatile than the current market. Based on the computation of Compound Annual Growth Rate (CAGR), TEOSENG has an expected market return of 4.46%.
In my opinion, TEOSENG’s prospect remains bright due to its active innovation, investment in cost-cutting technology and passionate advocacy of their brands. Despite the local’s eggs oversupply situation the company still able to deliver growth performance in its revenue, gross profit and profit after tax as compared to the results in FY2017. The Return on Equity has also improved from 1.391 times in FY2017 to 10.940 times in FY2018. I believe the company has potential to achieve outstanding performance in the future.
Disclaimer
The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor.