Stocks to watch: Plantations, Alam Maritim, TPC, JCY

KUALA LUMPUR (Dec 29): Blue chips on Bursa Malaysia are likely to hang on to their gains on Thursday, albeit adverse external news from the US or the eurozone, but volume is expected to be thin.

On Wednesday, the FBM KLCI reversed its earlier losses and closed above the important 1,500-level for the second day, spurred by some late buying into select blue chips and PLANTATION []-related counters. The FBM KLCI rose 3.20 points to 1,504.11.

The KLCI bucked regional markets where Hong Kong’s Hang Seng Index fell 0.59% to 18,518.67, Japan’s Nikkei 225 lost 0.20% to 8,423.62, South Korea’s Kospi fell 0.92% to 1,825.12, Taiwan’s Taiex was down 0.40% to 7,056.67 and Singapore’s Straits Times Index shed 0.28% to 2,666.25.

At Bursa Malaysia, local funds could be still involved in late window dressing. The KLCI futures closed 0.5 of a point higher at 1,504.50, reflecting the firmer sentiment.

Plantations could be in focus, after the third-month CPO futures rose RM24 to RM3,186 per tonne on concerns that rains in the main growing areas of Malaysia could affect harvests.

Other stocks in focus could be ALAM MARITIM RESOURCES BHD [], TPC PLUS BHD [], hard disk drive manufacturer JCY International Bhd and PROTON HOLDINGS BHD [].

Alam Maritim (M) Sdn Bhd had recently received a letter of award from Sarawak Shell Bhd for the modules offshore transportation and installation contract valued at RM29.80 million.

The nine-month contract started the current fourth quarter and the expected date of completion was May 2012. The contract is not renewable.

HUAT LAI RESOURCES BHD [] has made a conditional take-over offer for the remaining 66.29% stake in TPC Plus Bhd at 30 sen a share. The take-over offer would involve the remaining 52.032 million shares at the cost of RM15.61 million.

JYC share price close at near a 13-month high of RM1.05 as it was not affected by the recent severe Thai floods and due to strong demand.

OSK Research had on Dec 23 upgraded the TECHNOLOGY [] sector a Neutral as the worst impact from the Thai floods should be over while restoration of production in Thailand was going on at full steam.

The research house had said it came to understand that Western Digital and Seagate had used this opportunity to push for higher prices of their HDD products (50%-100%) whilst cutting down warranty periods

“As for JCY, we are raising our earnings forecast by more than 100% as their equipment was unscathed. Valuation switched from 0.9 times PBV to 8 times FY12 PER. Call upgraded to Trading Buy with FV of RM1.30. We understand that there are rumours of a strong price push over the next one month,” it said.

National car maker Proton could continue to see trading interest on the strong positive newsflow that the party keen to buy Khazanah Nasional’s 42.7% equity stake would be subjected to a general offer.

Khazanah managing director Tan Sri Azman Mokhtar said in written replies to The Edge weekly that they have been receiving offers for various forms of collaboration, including acquiring its controlling stake in Proton but have not arrived at any decision to sell to any particular offeror.

Meanwhile, the Employees Provident Fund (EPF) Board continued to reduce its shareholding in YTL POWER INTERNATIONAL BHD [], with the latest disposal of 1.44 million shares on Dec 22.

The EPF sold the shares on Dec 22 and reduced its shareholding to 703.38 million or 9.68%. On Dec 1, it disposed of 831,600 shares and reduced its shareholding then to 714.60 million shares or 9.83%.

According to the filings, from Dec 1 to Dec 22, the EPF had disposed of 12.05 million shares.



Get your T+10 interest FREE margin trading account NOW. Attractive brokerage for online trading. Contact Mr Ho at +603-5192 0808 or hoxian@sjsec.com.my for more details.

TPC Plus gets take over offer from Huat Lai

TPC Plus Bhd has received a notice of conditional take-over offer from Huat Lai Resources Bhd (HLRB) for all the remaining shares of the company not already owned by HLRB and the persons acting in concert with HLRB.

Huat Lai's offer involves up to 52,032,000 ordinary shares (offer shares) or 66.29 per cent of the issued and paid-up share capital of the company for 30 sen per offer shares (totalling RM15.61 million).

The company's Board does not intend to seek an alternative person to make a take-over offer for the offer shares, it said in a filing to Bursa Malaysia in Kuala Lumpur.

Inter-Pacific Securities Sdn Bhd has been appointed to act as the independent adviser to advise the Board and shareholders of TPC on the offer.

TPC Plus said the offer would remain until 5pm for a period of not less than 21 days from the posting date. -- BERNAMA



Get your T+10 interest FREE margin trading account NOW. Attractive brokerage for online trading. Contact Mr Ho at +603-5192 0808 or hoxian@sjsec.com.my for more details.

Poultry stocks start to hatch?

KUALA LUMPUR: Poultry companies are not the first thing that typically come to mind when someone is looking for a stock to buy. Long viewed as unexciting and small with volatile earnings, the sector has largely been shunned by investors.

Sentiment was further dented by outbreaks of bird flu. But there are good reasons to change that perception. Many poultry stocks are trading at low single digit multiples and below book value. Add an ongoing industry consolidation, the end of bird flu and rising chicken and egg prices, the bigger companies may end up much more profitable as economies of scale set in. This could well trigger a re-rating of the sector.

Over the past year, poultry-related stocks have proven to be fairly resilient compared to the general market. Many, particularly those mainly involved in egg production, have hatched some good returns despite the weak broader market, as their earnings in recent quarters have shown a marked improvement.

Using as a benchmark the FBM KLCI, which fell by 3.9% to 1,468.75 last Friday from 1,528.01 a year ago, poultry stocks have performed relatively well.

Year-to-date Huat Lai Resources Bhd has gained 45.3%, Farm’s Best Bhd (38.6%), TPC Plus Bhd (18.8%), Teo Seng Capital Bhd (14.1%), CAB Cakaran Corp Bhd (11.1%), Lay Hong Bhd (2.3%), LTKM Bhd (0.5%), QL Resources Bhd (0.3%), while Leong Hup Holdings Bhd has shed 4.2%.

Most poultry counters are trading at a low price-earnings ratio (PER), below book value and have small market capitalisations.

Seven stocks, Teo Seng, Huat Lai, Farm’s Best, CAB Cakaran, Lay Hong, Leong Hup, and LTKM are trading at single digit PER, as low as 3.35 times for Farm’s Best, while seven stocks are trading below their book values. This makes them attractively priced yet fairly defensive stocks in an uncertain market.

“It would not be surprising if they become acquisition targets,” said an industry observer, adding that they have shown good growth over the last few years and there have been increasing mergers and acquisitions in the sector.

Among the names to watch, industry observers say, are Teo Seng, Huat Lai, Lay Hong, LTKM and Farm’s Best, as these stocks are trading at low PER and price-to-book valuations (P/BV).

As economies of scale improve through expansion, M&A or improved efficiency, earnings will expand and their already low PER could decline.

Market observers think Teo Seng deserves a look as the company has an excellent profit track record, unlike many of its peers, having chalked up compound annual growth rate (CAGR) for revenue and net profit of 9.2% and 20.8% since it was listed in 2008. Despite being one of the best performing stocks within the sector, its valuations are still low with a trailing PER of 5.31 and P/BV ratio of 0.93 times.

Another poultry company to note is Huat Lai, the country’s largest egg producer, which also chalked up the largest stock performance gains among its peers. Its stock has returned 45.3% over the past year and is still trading at a low trailing PER of 3.72 and decent P/BV of 1.34 times. Although its net profit in the past five years has been shaky, many say that once its proposed acquisition of TPC goes through, synergies should smoothen things out.


Under the new parentage of QL Resources, the fourth largest egg producer, Lay Hong has a more promising outlook coupled with good earnings growth in the past few years. Although its stock returned a mere 2.3% in the past 52 weeks, its reasonable PER of 5.62 times and P/BV of 0.71 times should still appeal to investors.

Investors seeking a company with recent good growth might want to consider LTKM, the fifth largest egg producer. Its CAGR from 2007 to 2011 came to 15.2% for revenue and 31% for net profit. It was trading at a trailing PER of 5.1 times and had a P/BV of 0.63 times.

Also deserving a mention is Farm’s Best, with its diverse range of poultry-related operations and recent expansion. The stock has returned 38.6% over the year, trades at a trailing PER of only 3.35 and at half book value. It has recently entered into two sales and purchase agreements to acquire two broiler farms, which will increase its broiler production by about 6% and is expected to contribute about RM16 million in annual revenue from 1Q12 onwards.

Positive industry outlook
On a macro perspective, the poultry industry has an encouraging long-term outlook given the strong demand for its products, coupled with increasing prices and Malaysians being one of the biggest consumers of eggs in the world.

The number of table eggs produced in Malaysia has grown 49.69% from 5.72 billion in 2000 to 8.57 billion in 2010, according to data from the Federation of Livestock Farmers’ Associations of Malaysia (FLFAM).

While the annual growth of 4.12% is modest, it has outpaced the country’s population growth of about 2.02% annually.

As for egg consumption, Malaysia ranks as one of the highest globally with an average consumption per capita of 320 eggs annually, compared with 250 in the US.

The majority of eggs produced are consumed domestically, but there is also growing demand for exports, which accounted for 14% of total production in 2010, according to an article in the November 2011 edition of Poultry International. The bulk of these exports went to Singapore (63.9%), while the remaining markets include Indonesia and Hong Kong.

Despite the billions of eggs produced, producers reportedly enjoy a gross margin of only one sen an egg, on average.

According to the article, the annual ex-farm price per egg was 30 sen in 2010 with production costs running at 29 sen. This puts the value of 2010’s egg production at RM2.57 billion, but with implied gross profit of only RM85 million.

Given the slim margins, poultry players appear, since late last year, to be positioning themselves to achieve higher economies of scale through M&A.

And it is a game where the biggest and most efficient players make the money, and the smaller ones are either loss-making or being weeded out.

Indeed, the slew of recent M&A is creating some excitement in the sector, throwing the spotlight on undervalued companies and triggering consolidation exercises that may well produce stronger, more profitable and potentially exciting players.

It is also noteworthy that egg prices have been on the rise this year, especially over the last month, which should be positive for margins. According to the Federation of Livestock Farmers’ Associations of Malaysia, the price of ex-farm Grade A eggs has risen by 16.7% from 30 sen per egg in early October to 35 sen on Nov 14.

M&A galore
For a sector that’s normally quiet, there has been a relatively large number of M&A over the past year.

It started in August 2010, with QL Resources Bhd buying a 23.29% stake in Lay Hong Bhd for RM48.55 million.

Last month, Huat Lai proposed to acquire a 35.65% stake in TPC for RM8.08 million.

Interestingly, the stakes of Lay Hong and TPC were sold by the same company, London Biscuits Bhd (Lonbisco) -- a confectionery maker.

In between, there was Leong Hup Holdings (an integrated poultry operator) and Emivest Bhd (mainly involved in livestock feed), receiving an offer in November 2010, totalling RM426 million from a major shareholder, Emerging Glory Sdn Bhd, to acquire all their assets and liabilities.

According to a news report last month, Leong Hup has still not decided when it will call an EGM to deliberate on the proposed takeover, but it could likely have it in the last quarter of the year or 1Q12.

Integration: Vertical or horizontal?
Interestingly, when Lonbisco bought into Lay Hong and TPC in Nov 2006 and Feb 2010, its rationale then was to ensure an adequate, regular and continuous supply of eggs at a “controlled price” to meet its ongoing expansion plans. Lonbisco is a manufacturer of cakes and confectionery.

It did not provide a rationale for disposing of its stakes but industry observers believe that the investments did not provide effective synergies.

According to an analyst, unlike Lonbisco, Huat Lai and QL will enjoy cohesive synergies as they are acquiring companies which have similar operations to their own.

He said the companies will achieve synergies from raw material sourcing arrangements, supply chain networks and operational efficiency.

The synergy between Lonbisco and the poultry companies, he explained, may not have been that effective because eggs, although a major ingredient in London Biscuit’s products, did not account substantially for its product costs.

In contrast, the analyst said, KFC Holdings (M) Bhd is an example of a synergy that worked well. He said KFC restaurant’s main product, chicken, accounts for a large part of its product costs and is backed by the company’s fully integrated poultry operations.

KFC’s wholly-owned subsidiary, Ayamas Integrated Poultry Industry Sdn Bhd, is involved in breeder and broiler farms, hatchery, and feedmill. KFC also has wholly-owned subsidiaries that have plants for processing and further processing poultry.

KFC’s integrated poultry operations in 2010 had an inter-segment revenue of RM287.88 million, which accounted for 35% of the segment’s total revenue of RM821.28 million.

The total revenue for KFC’s integrated poultry operations has grown by 16.5% annually from 2006 to 2010.

Given that margins in the egg business are slim, it would therefore make better sense for players to merge and gain economies of scale, rather than food producers acquiring them for vertical integration.


This article appeared in The Edge Financial Daily, November 14, 2011.



Get your T+10 interest FREE margin trading account NOW. Attractive brokerage for online trading. Contact Mr Ho at +603-5192 0808 or hoxian@sjsec.com.my for more details.

Choice of some egg players

Teo Seng Capital Bhd
One of the best performing poultry stocks is Teo Seng, the third largest egg producer in the country.

Closing at 48.5 sen last Friday, the counter has gained 14.1% over the past year. It had a market capitalisation of RM97 million and a trailing price-earnings ratio (PER) of 5.31 times. Its book value at end-June was 52 sen, placing the stock at a price-to-book ratio of 0.93 times.

An integrated poultry company, Teo Seng produces 2.2 million eggs daily and is involved in layer farming, manufacturing and marketing of paper egg trays, animal feeds and distribution of animal health products.

Since its listing on the then Second Board of Bursa in 2008 until 2011, Teo Seng has chalked up compound annual growth rates (CAGR) for revenue and net profit of 9.2% and 20.8%.


For its 1QFY12 ended June, Teo Seng’s net profit increased year-on-year (y-o-y) to RM4.76 million from RM4.19 million previously, while its revenue grew to RM61.28 million from RM43.72 million.


Huat Lai Resources Bhd and TPC Plus Bhd
Among the next best performers were Huat Lai and TPC Plus. Industry observers say that once Huat Lai’s acquisition of TPC Plus goes through, both companies will enjoy better financial results from better economies of scale.

Last month, Huat Lai proposed to acquire a 35.65% stake in TPC Plus for RM8.08 million from London Biscuits Bhd.

Huat Lai, with a trailing PER of 3.72 times and market capitalisation at RM185.6 million, was up by 45.3% to RM2.15 from a year ago. It is trading 34% above its book value of RM1.61 as at end-June.

An integrated poultry operator, Huat Lai is Malaysia’s top egg producer with a daily output of three million eggs, while TPC, which focuses on eggs, produces 500,000 eggs daily.

Huat Lai’s revenue has been on an upward trend over the past five years, reaching RM611.76 million in 2010 from RM220.25 million in 2006.

However, its profit trend has been inconsistent, but results were promising in the last two years.

Huat Lai returned from a net loss of RM8.96 million in 2006 to a net profit of RM2.12 million in 2007, before going into the red again with a net loss of RM12.56 million in 2008 and then returning to a net profit of RM10.4 million in 2009 and RM24.59 million in 2010.

TPC had a decent share price increase of 18.8% from a year ago to 28.5 sen last Friday. It had trailing PER of 17.27 times and market capitalisation of RM22.8 million — one of the smallest among poultry counters. As at end-September, its book value was 39 sen.

TPC was loss-making from FY06 to FY09. But, for the 18 months from Jan 1, 2010 to June 30, 2011 (TPC changed its FY from Dec 31 to June 30, this year), the company posted a revenue of RM73.55 million and net profit of RM605,000.


Farm’s Best Bhd
Farm’s Best’s stock was up by 38.6% from last year, closing at 79 sen last Friday. The company has enjoyed strong earnings in the past few quarters and has a trailing PER of 3.35 times and a relatively small market capitalisation of RM43.87 million. The stock is also trading at less than half its book value of RM1.58, as at end-June.


Farm’s Best has poultry operations spanning hatchery operations, feed, poultry processing, medications and vaccines, and food products (nuggets, burgers, sausages and so on).

It recently entered into two sale and purchase agreements to acquire two broiler farms in Negri Sembilan.

The two farms have a total capacity of 400,000 birds and are expected to produce about 2.2 million broilers a year, which will increase Farm’s Best’s broiler production by about 6%, the company told TEFD.

Annual revenue from the farms is expected to be about RM16 million and contributions will be from 1Q12 onwards.

Farm’s Best said its live broiler sales and processed poultry accounted for about 97% of its revenue with the rest coming from egg production.

For its 2QFY11 ending June, it reported a 103% y-o-y increase in net profit to RM4.24 million from RM2.09 million previously. Revenue climbed 16.5% to RM94.92 million from RM81.5 million a year ago.

Revenue and net profit for the first six months of 2011 stood at RM189.38 million and RM7.25 million, respectively.

Notably, Farm’s Best’s net profit for the first half of 2011 has more than doubled compared with the full year’s total for 2010.

The company returned to the black in 2010 with a net profit of RM3.6 million from a loss of RM4.64 million in 2009, although revenue declined to RM331.16 million from RM346.34 million.

The improved results were due to the softened prices of imported feed, it said.


CAB Cakaran Corp Bhd
CAB is mainly involved in integrated poultry farming and processing. Its stock has climbed 11.1% since last year to close at 35 sen last Friday.

It traded at a trailing PER of 4.13 times and had a market capitalisation of RM46.1 million. As at end-June, its book value was 71 sen.

After climbing out from a net loss of 10.73 million in FY06 ending Sept 30, CAB’s financial results have been promising.

For its FY10, its net profit increased y-o-y to RM7.7 million from RM22,828 previously, while revenue increased to RM508.15 million from RM494.42 million, due to higher average ex-farm price of broilers and better cost management, said the company.

Also due to better profit margins in broilers, CAB in its 3QFY11 ending June, posted a 107.5% increase in net profit to RM4.44 million from RM2.14 million a year ago. Revenue dipped marginally to RM122.29 million from RM123.05 million previously.

Its poultry operations accounted for almost 90% of revenue in 2010. It also has operations in restaurant & franchising and marine products manufacturing but these divisions suffered losses in 2010 with pre-tax losses of RM180,000 and RM400,000, respectively.


Lay Hong Bhd
Lay Hong is the fourth largest egg producer at 1.5 million eggs daily. Its stock increased slightly by 2.3% since last year to close at RM1.79 last Friday.

It has a market capitalisation of RM88.9 million and traded a trailing PER of 5.6 times.

Its book value at the end of June was RM2.53.


The company has reported consecutive y-o-y increases in net profit and revenue since FY08. For the FY11 ended March, it reported a 43% y-o-y increase in net profit to RM14.76 million from RM10.33 million. Revenue increased to RM423.11 million from RM388.75 million last year.

An integrated poultry company, Lay Hong is mainly involved in the production of eggs, broiler breeding and farming and feedmill activities. In Aug 2010, QL Resources Bhd bought a 23.29% stake in Lay Hong Bhd for RM48.55 million, or RM1.05 per share, from London Biscuits Bhd.


QL Resources Bhd
Integrated and diversified agriculture player QL Resources is highly regarded by analysts and won The Edge Billion Ringgit Club’s “Company of the Year” award for 2011.

Its share price only increased marginally by 0.3% since last year to close at RM2.93 last Friday, but it has been enjoying double-digit growth for the past decade. In its first 10 years as a listed company — from 2000 to 2010 — the company achieved a 10-year average return on equity (ROE) of 23% as well as a 23% annual gain in its share price.

At current prices, the stock is trading at a trailing PER of 18.8 times and has a market capitalisation of RM2.44 billion. Its book value as at end-June was 92 sen.

QL is the second largest producer of eggs in Malaysia with a production of 2.7 million eggs daily. The livestock division accounted for roughly 56% or RM991.03 million of its total revenue in FY2011.

The company’s other activities are surimi or fish paste manufacturing and palm oil.

QL’ s growth over the past five years has been impressive. Its CAGR from 2007 to 2011 for revenue and net profit was 12.3% and 18% respectively.

For FY11, it posted net profit of RM124.55 million on revenue of RM1.78 billion.


Leong Hup Holdings Bhd
Leong Hup Holdings’ (LHH) stock fell by 4.2% to RM1.60 from a year ago. It had a market capitalisation of RM283.3 million and a trailing PER of 5.2 times. Its book value at the end of June stood at RM2.37.

One of the industry’s largest and oldest players, LHH is the biggest day-old chick producer and also the biggest broiler distributor in Malaysia, industry sources say.

Its key activities are breeding and rearing of parent stocks, broiler day-old chicks, contract farming, slaughtering and processing of broiler chickens and retailing.

LHH also has a 27.74% effective ownership in Teo Seng, according to its 2011 annual report.

LHH has a 0.62% direct stake in Teo Seng, while its 51% owned subsidiary, Advantage Valuations Sdn Bhd has a 51.12% stake in Teo Seng.

For FY11 ended March 31, LHH’s revenue rose 18.4% to RM1.35 billion from RM1.14 billion in FY10. Net profit climbed by 40.4% to RM47.91 million from RM34.12 million previously.

For its 1QFY12 ended June, LHH reported a y-o-y jump in net profit to RM14.2 million from RM10.05 million previously. Revenue increased to RM420 million from RM294.8 million a year ago.


LTKM Bhd
Closing at RM1.89 last Friday, LTKM’s share price was up only by a marginal 0.5%. But its share price has been rising and more than doubled since 2009.

LTKM had a trailing PER of 5.1 and a market capitalisation RM82 million last Friday. It was trading 37% below its book value of RM3 (as at end-June).


With operations predominantly in egg production, LTKM is Malaysia’s fifth largest egg producer with an output of 1.2 million eggs a day.

In the period from 2007 to 2011, its CAGR for revenue and net profit was 15.2% and 31%.

The company is also involved in the mining and trading of sand, and manufacturing and sale of processed glass.

But both activities accounted for less than 3% of its FY11 revenue.

In its FY11 ending March, LTKM posted a net profit of RM16.01 million on the back of RM150.49 million in revenue.

For its FY10, its net profit increased to RM7.7 million from RM22,828 previously, while revenue increased to RM508.15 million from RM494.42 million, which the company attributed to higher average ex-farm price of broilers and better cost management.


This article appeared in The Edge Financial Daily, November 14, 2011.



Get your T+10 interest FREE margin trading account NOW. Attractive brokerage for online trading. Contact Mr Ho at +603-5192 0808 or hoxian@sjsec.com.my for more details.