Potential impact of higher poultry prices
? The government recently announced efforts to combat high poultry prices by lowering maximum selling prices and allowing more APs to import chicken.
? This is negative for poultry stocks due to pricing competition from imported chicken, while caps to selling prices will lead to margin compression.
? Companies under our coverage (QL and CCK) with exposure to the poultry business are less unaffected due to having a more diversified supply chain.
Government announces measures to taper high poultry prices
In view of rising poultry prices (broiler and egg), the Malaysian government has announced measures to mitigate the impact on consumers. These include: i) maintaining the ceiling selling price of chicken eggs under the Malaysian Family Maximum Price Scheme (5 Feb to 5 Jun 2022), ii) lowering the ceiling selling price for whole chickens to RM8.90/kg (from RM9.10/kg), iii) allowing all approval permit (AP) holders to import whole chickens (vs. certain parts previously), and iv) opening up APs for hypermarkets to import chicken. It also plans to provide subsidies for poultry producers to lower farm selling prices.
Negative in our view, for Malaysia’s poultry sector
In our view, the rising poultry selling prices are due to: i) higher feed cost prices (corn and soybean meal price rose 30.9% yoy and 16.6% yoy respectively in 2021), ii) higher operating costs, mainly labour due to shortage of foreign workers, iii) lower production volume (impact of Covid-19), and iv) weakening of ringgit vs US$. Based on our channel checks with poultry producers, the implementation of a ceiling selling price of whole chickens would lead to steep margin compression due to rising costs. Also, allowing
imports of whole chickens from overseas (beyond a short-term period of 3 months) would have long-term consequences on the supply-demand dynamics of Malaysia’s poultry market, as local poultry producers will have no choice but to cease operations due to their lower competitiveness.
QL and CCK are less affected than its peers by these measures
Overall, we view this negatively for Malaysia’s poultry industry as we foresee margin compression and lower sales volume of chicken from these near-term government measures. Under our coverage, stocks with exposure to the poultry business are QL and CCK. Despite near-term headwinds, we are of the view that both stocks will be less affected compared to its other peers. For QL, the impact of higher feed costs is mitigated by its feed raw material sourcing division (60% of QL’s integrated livestock farming division), which practices a cost pass-through mechanism (higher profit from larger revenue base). In CCK’s case, it has a 27.2% stake in Gold Coin Sarawak, its main feed cost supplier, while it can shift its poultry sales mix to chicken cuts, which have no selling price ceiling. On the issue of imported chicken, we believe that the government is likely to only allow temporary imports of whole chickens, until selling prices of local chickens decline.
We still keep our Add calls on QL and CCK; Neutral on the sector
We keep our Add calls on QL and CCK and retain our Neutral call on the overall consumer sector. For QL, we believe its stock earnings have bottomed in 9MFY3/22, while all its divisions should benefit from the reopening of the economy. In CCK’s case, the stock remains grossly undervalued (its CY22F P/E is at a 71.1% discount to the overall consumer sector’s CY22F P/E of 35.3x) and perceived as a poultry stock, despite 85.2% of 9M21 revenue derived from its retail division (69 retail outlets nationwide). Key downside/upside risks to our Neutral view on the consumer sector: i) weaker/stronger-than-expected sales volume, ii) higher/lower-than-expected raw material prices and iii) another lockdown in Malaysia/further easing of social distancing measures in Malaysia.