Mainstream
Egging caution on bullish outlook
Lim Cian Yai 
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THE first half of the year has been a mixed one for listed layer farms and egg producing companies.

There was an oversupply of eggs and an epidemic like avian flu which somewhat hampered consumers’ appetite for the product. Profits in Q2 declined compared to Q1.

Nonetheless, many of the companies’ shares moved up between 10% and 56% year-to-date, and shareholders can expect better times as egg prices increase due to supply constraints.

That said, many are expected to post better quarter-on-quarter results in the three months ending Sept 30.

Notwithstanding the bullish short-term outlook, the rapid capacity expansion may lead to oversupply again next year and beyond.

Hence, rising egg prices will be a key factor. As of Sept 10, the farm price for grade A eggs has recovered to 34 sen each from 31 sen in March.

The level was last seen early this year, according to weekly data compiled by the Federal Agricultural Marketing Authority.

Another factor would be that the prices of corn and soybeans which are used to make poultry feed are at comfortable levels compared to before.

Poultry feed generally consists of two-thirds corn and one-third soybean meal. About 90% of feed resources are imported, with the bulk of corn and soybean meal sourced from Argentina, Brazil and the US.

The Chicago Board of Trade’s (CBOT) December futures for corn changed hands at US$3.525 per bushel as of Sept 19, 15% down from US$4.147 in July.

Similarly, the price of soybean on the CBOT’s November futures was down 7% from a 52-week high of US$10.433 per bushel in July.

Coupled with the appreciation of the ringgit against the greenback in the last two months, the combination of these factors are expected to provide some relief to poultry players.

 

Higher egg prices

Eggs are graded according to weight, and the heavier an egg is, the higher market price it commands. For the past nine months, the average chicken egg price in Peninsula Malaysia has largely hovered between 28 sen each for grade C and 33 sen for grade A.

In late March and early April, the price for grade A eggs went as low as 31 sen each. It then climbed to 32 sen each in May and 33 sen in June. Grade A eggs are now sold at 34 sen each at the farm level.

The three sen difference matters a lot for layer chicken farmers as it represents some 10% increase compared to six months ago. They are retailed at about 40 sen each.

Generally, the price is marked up by about two sen each for every level of distribution. Wholesalers source eggs from the farm and distribute to retailers who sell to consumers.

Tan says the coming quarter will be better

LTKM Bhd managing director Datuk Tan Kok anticipates the coming quarter will be better.

The company, which is the fourth largest listed egg player, slipped into losses in Q1 FY18 ended June 30.

Sales were down 6.72% year-on-year (yoy) to RM39.81 mil from RM42.68 mil the previous corresponding period. It recorded a net loss of RM1.06 mil versus a net profit of RM3.06 mil for the same period.

As LTKM derives 98% of sales from its egg business, the decline in revenue and earnings were due mainly to the price drop and increase in the cost of sales.

“We are expected to be back in the black in the quarter ended Sept 30. It will be driven by higher egg prices in the third quarter [calendar year] and comfortable feedstock prices,” Tan tells FocusM after the conclusion of its annual general meeting on Sept 20.

The company’s 182ha automated layer farm in Melaka produces 1.45 million eggs per day.

Teo Seng Capital Bhd which ranks second among listed players by volume also bled red ink in Q2.

Revenue for the three months ended June 30 was down 11.75% yoy to RM95.26 mil.

In line with the lower sales, the group recorded a net loss of RM9.23 mil. It recorded a net loss of RM13.92 mil in H1 against RM196.74 mil revenue.

Teo Seng attributed the sluggish performance to the lower selling prices of eggs and higher feed cost.

 

Influenza boost

Selangor and Kuala Lumpur Egg Dealers Association president Low Hin Ching says: “The egg industry experienced some consolidation a few months ago.

“There was a supply glut in the market, causing egg prices to be depressed. Eventually, it was rendered unprofitable to run the business and we saw some small-scale layer farmers exiting the industry.

“Supply is tight now, which is why we see egg prices increasing. It currently retails at 40 sen each for grade A,” he says.

The downturn in the egg industry coincided with an outbreak of H5N1 bird flu in March. The influenza was first detected in Kota Bahru on Feb 28.

This was the first H5N1 outbreak reported in the country in nearly 10 years. The last reported case occurred in 2007 and affected village chickens in Selangor.

Malaysia was declared free from H5N1 bird flu virus on July 1. This follows an absence of the disease after 90 days of the last disinfection procedure on April 1.

Some industry players do not see this as a major concern as the outbreak was well-contained within Kelantan only and the state is not a major broiler or egg producer.

Notwithstanding this, integrated poultry player QL Resources Bhd felt consumption took a beating due to the influenza.

The 10 integrated livestock farming bases it owns experienced mixed fortunes in FY17 ended March 31.

“Egg production bases including those in Peninsular Malaysia were impacted by market oversupply.

“It also took a beating from weakened consumption sentiments due to the Kelantan H5N1 cases, resulting in a crushing force on egg prices,” it stated in its 2017 annual report.

Nevertheless, regional and East Malaysia farm operations provided some buffer and growth to QL Resources’ poultry sector.

Some farmers received a boost arising from the fipronil contaminated egg outbreak in Europe and certain parts of Asia.

A commonly used insecticide to get rid of fleas, lice and ticks, fipronil is banned by the European Union for use on animals for human consumption, such as chickens.

In an email reply, QL Resources says it is not a practice for poultry farms to mix the insecticide with cleaning agents and sanitizers to keep farms clean.

“We only use insecticides when the farm is emptied. This serves to avoid chemical contact with the chickens,” the company says.

It says the recent price surge in eggs has no relation to the fipronil incident in EU. The use of the insecticide is allowed in Malaysia under the Pesticide Act 1974 First Schedule.

Pursuant to the outbreak, it was reported that Hong Kong merchants turned to Malaysia for supply. But LTKM’s Tan stresses that the effect is momentary.

Instead, it is the Singapore market that provides another stable revenue stream for the company. There are 18 Malaysian chicken layer farms approved to export table eggs to the city state.

Eggs and poultry meat are a preferred source of protein for Malaysians. Regardless of whether the economy performs or not, the consumption of eggs and poultry continues rising.

Data from the Department of Veterinary Services (DVS) shows egg prices rising between 2006 and 2015, from 22 sen each to 36 sen for grade A.

 

Resilience

The DVS estimates that the average Malaysian consumed 385 chicken eggs or duck eggs last year. This is an increase of 3.49% compared to 372 eggs in 2015.

Malaysia has achieved self-sufficiency when it comes to egg supplies, says LTKM’s Tan.

The company has no plans to expand its production capacity in view of the abundant supply in the market.

Industry developments may not bode well for LTKM and others that are not expanding capacity.

It is likely its market shares will be overtaken by peers which are aggressively expanding.

Instead, LTKM will intensify efforts to kick-start its property division. It will embark on a planned residential property project in Jenjarom, Selangor.

It also closed two land acquisition deals last year to pave the way for future development of its real estate business.

LTKM had previously undertaken a small scale property development project in Banting which was completed in 2013. The property segment did not contribute significantly to overall performance.

The board views property development activities under the group to become more significant with the plan to develop the land.

While the existing core business is profitable, the group intends to capitalise on diversifying its income with the acquisition of strategic land banks.

“Our core business is stable. So going into property development is our diversification strategy to provide more upside,” Tan says.

 

Added capacity

Industry players are adding more capacity, with some expanding beyond the growth rate of domestic consumption.

It shall be closely monitored if the domestic market is able to digest the impact of such expansion. The concern is if supply increases, it will again stifle an upside in egg prices.

QL Resources, for instance, is in the midst of completing a new integrated layer farm project in Raub by FY18 ending March 31.

Upon completion of the first phase, total egg production will be expanded by 500,000 to 5.1 million per day.

Teo Seng Capital which exports one-third of its production to Singapore is busy expanding to achieve a daily production of five million eggs by 2020.

Another leading player Lay Hong Bhd will also increase capacity to three million eggs daily in the next two years from 2.3 million currently. It sold 626 million eggs in FY17 ended March 31.

Meanwhile, companies like CAB Cakaran Corp Bhd, which are only involved in the production of chicks, are also making a maiden venture into the layer business.

The firm is partnering with Indonesia’s Salim Group, which is also a substantial shareholder of the former, to build an integrated poultry farm and plants in Jakarta.

The Indonesian operations will only kick off at the end of next year or early 2019. It is envisaged to produce four million broilers per month and three million eggs per day.

The joint venture with Salim Group and ongoing acquisition of breeder and poultry farms are deemed a growth impetus for CAB Cakaran, said online stockbroker RakutenTrade in its Sept 5 report.

The firm issued a target price of RM1.28 for the counter.

CAB Cakaran’s broiler capacity stood at 4.5 million birds per month. This is set to rise to seven million with the acquisition of breeder and poultry farms from Sinmah Group of companies.

 

Top listed egg producers

1. QL Resources Bhd

QL Resources is the largest listed egg producer with 4.6 million churned out per day.

It is in the midst of completing a new integrated layer farm in Raub, Pahang, by FY18 ended March 31, with an investment of RM50 mil.

The new farm will have a capacity of 500,000 eggs per day upon completion of its first phase.

The company runs diverse but synergistic businesses. Its turnover broke the RM3 bil mark in FY17 to record RM3.01 bil versus RM2.85 bil the year before.

Net profit increased by 2% to RM195.02 mil during the year.

Besides its poultry business, it is the largest manufacturer of surimi and fishmeal in Asia and made its presence felt in the palm oil sector as well.

In the past one year, QL Resources has intensifed its efforts to expand into the downstream convenience store business as well.

The move to extend into retail via FamilyMart has strengthened its position and long-term growth in view of the low penetration of convenience stores.

It also serve as a channel for QL Resources to market its surimi and fishmeal products. As at July 7, last year, 14 stores have been opened in the Klang Valley.

The company is controlled by the Chia family via CBG Holdings Sdn Bhd (42.07%) and Farsathy Holdings Sdn Bhd (12.08%).

It is led by group managing director Chia Song Kun who founded it together with his brothers in 1987.

 

2. Teo Seng Capital Bhd

Johor-based Teo Seng is a key player in the local layer farming industry.

The company was incorporated in May 2006 and was listed on the second board of Bursa Malaysia in October 2008. It was subsequently transferred to the main board in August 2009.

Its principal activities are poultry farming and marketing of chicken eggs, manufacturing and marketing of animal feed, egg trays, organic fermented fertilisers and the distribution of pet food, medicines and animal health products.

In short, the company has progressed by venturing abroad. Its subsidiary Premium Egg Products Pte Ltd entered the Singapore commercial egg industry in 2013 and managed to garner 19% market share in the city-state. 

To further broaden its presence in the country and Singapore, it spent RM56.1 mil in FY16 ended Dec 31, to set up new farms, upgrade facilities and increase production lines for paper egg trays and feed mills.

By 2020, its total daily egg production is expected to reach five million from 3.5 million currently.

Teo Seng is 51.16%-owned by Advantage Valuations Sdn Bhd, which in turn is related to Leong Hup (Malaysia) Sdn Bhd.

It is led by executive chairman Lau Jui Peng and managing director Nam Yok San.

 

3. Lay Hong Bhd

Lay Hong has come a long way from its layer farming operations in the 1960s. From a production capacity of 10,000 eggs, it now produces over two million daily.

The Klang-based poultry player is the third largest listed egg player in the country by volume.

Listed on the main market of Bursa Malaysia in October 1994, it now produces 2.3 million eggs per day from its 10 layer farms in Selangor, Melaka and Sabah as of June 30.

In FY17 ended March 31, 626 million eggs were sold versus 589 million the previous year.

Of this, 23.62% or 148 million were functional eggs enriched with health properties.

This represented an increase of 12 million eggs year-on-year, as health-conscious consumers spurred the increase in demand for them.

Production will be expanded to three million eggs over the next two years as a result of its plans to invest in two new automated farms in Selangor and Sabah to meet increasing demand.

Besides the egg business, other activities include producing fresh table chilled and frozen dressed chicken, chicken parts and processed related chicken products.

The company operates 17 retail outlets and one distribution centre under the G-mart name in suburban towns in Sabah.

These stores enable it to market its poultry and processed food products directly to the end-consumers on a cash basis, resulting in better margins and reduced cash flow risks.

Lay Hong is majority-owned by Innofarm Sdn Bhd and NH Foods Ltd with 31.05% and 21.77% stake respectively.

 

4. LTKM Bhd

Klang-based LTKM was listed on Bursa Malaysia in 2000. Its core business is the production and sale of eggs with a minor presence in the extraction and sale of sand.

LTKM is the fourth largest listed layer farm operator going by the number of eggs produced per day.

It operates a large scale automated layer farm on 182ha in Melaka. The farm is able to produce up to 1.45 million eggs daily.

Revenue from the poultry segment remained unchanged at RM166.38 mil in FY17 ended March 31, versus RM166.06 mil the year before.

Despite this, segmental profit expanded to RM21.75 mil from RM18.36 mil in FY16 due to lower cost of sales.

The poultry division made up 98.5% of LTKM’s RM168.87 mil revenue in FY17.

The property segment will become an important source of income for LTKM in future as it embarks in stages on its residential property projects in Jenjarom, Selangor, which includes the development of medium-sized residences.

Revenue and contribution from this segment will start in the next two years, once new project launches commence.

LTKM is controlled by managing director Datuk Tan Kok via Ladang Ternakan Kelang Sdn Bhd and his personal interest with a combined stake of 64.78%.

 

5. TPC Plus Bhd

Since its incorporation in 1978, TPC Plus has been involved in the production, grading, packaging and sale of table eggs.

Its operations are domestic-based, with products mainly sold in the southern region. All its farms are located in Alor Gajah, Melaka.

For the year ended Dec 31, last year, it sold 285 million eggs to dealers, retailers and food manufacturers.

During the last 12 months, TPC Plus has built additional layer houses and improved existing machine facilities.

This has resulted in a production increase to some 840,000 eggs daily from 780,000 previously.

Listed in December 2003, the company was removed from its PN17 classification after regularising its financial position and level of operations.

It was classified as PN17 after auditors expressed concern over the group’s ability to continue as a going concern in the consolidated financial statements for FY12.

TPC Plus is controlled by the Lim family with a 59.71% interest via Huat Lai Resources Bhd, itself a formidable force in the local poultry market.

Huat Lai was delisted from Bursa Malaysia in January this year after TPC Plus was taken over by the Lim family in October last year at RM5 per share.

 

6. PWF Consolidated Bhd

Formerly known as PW Consolidated, the Penang-based company is an integrated poultry farmer with a presence in broiler, breeder, and layer farming, and poultry feed manufacturing.

It was incorporated in Feb 1997 and co-founded by Datuk Siah Gim Eng who held a 17.27% stake and an indirect interest of 36.11% in the company.

PWF Consolidated was subsequently listed on Bursa Malaysia in 2002, but its corporate journey started in 1978, when it ran a feed mill factory in Permatang Pauh, Penang, with a production capacity of 1,000 tonnes per month.

Most of its clients are based in the northern and central region. It first tried its fortunes in table egg production back in 2013 via a modern layer farm in Pendang, Kedah.

The company says production is 380,000-400,000 eggs per day. Like other poultry players, PWF Consolidated is also looking to expand production to 800,000 daily by FY16 ended Dec 31.

In its 2016 annual report, the company mentions plans to invest some RM100 mil over the next three years in broiler, breeder and layer farms.

The expansion will cater to the higher demand for day-old chicks by in-house broiler farms.

Meanwhile, the expansion of the layer farm will help increase its egg production capacity.

 

7. CCK Consolidated Holdings Bhd

CCK Consolidated is the largest integrated poultry farming company in Sarawak. It controls about 35% of the state’s poultry market for eggs and chickens.

Beyond Sarawak, it is also exposed to Sabah’s poultry market and those of Jakarta and Pontianak in Indonesia.

Since CCK Consolidated entered the layer farming business in 2013, it has gradually scaled up its production capacity in the segment, growing to between 180,000 and 200,000 eggs daily.

It plans to capitalise on the growing demand for poultry products in East Malaysia and is looking to increase broiler and layer farm production.

In a stock initiation report in May, CIMB Research says CCK’s daily broiler production will be increased to about 57,000 per day in the next two years. Production will then be expanded to 240,000 eggs daily.

CCK Consolidated is also into prawn farming and processing seafood products mainly for export.

For its retail segment, it runs 57 CCK Fresh Mart outlets mainly in East Malaysia.

These outlets mostly sell CCK Consolidated-produced fresh chicken and processed products such as sausages and burger patties.

Plans are underway to add another nine retail outlets in East Malaysia over the next four years.

Poultry farming and retail are the largest revenue contributors at 29.4% and 61.5% respectively for FY16 ended Dec 31.

Revenue increased by 13.14% year-on-year to RM559.04 mil from RM494.09 mil the year before.

Net profit grew in tandem to RM18.85 mil against RM13.51 mil the preceding year.

CCK Consolidated is controlled by Tan Sri Tiong Su Kouk with a collective indirect stake of 38.57% held via Central Coldstorage Sarawak Sdn Bhd and S.K. Tiong Enterprise Sdn Bhd.

He personally holds 6.5% interest in the company.



This article first appeared in Focus Malaysia Issue 251.