LARGE poultry and integrated agro-based groups such as Leong Hup International Bhd and QL Resources Bhd would still deliver decent earnings in 2021, despite the surge in the cost of raw materials used in chicken feed.

A poultry industry observer told StarBizWeek that size and integration enabled the large scale businesses to import feed input and conduct feed sales, which are expected to be profitable.

“Thus, the large player would have an advantage over the small scale farmers, ” he said.

MIDF Research analyst Ng Bei Shan concurrs, saying: “Generally, poultry players with upstream segment will be less impacted by the surge in feed prices as they tend to be more integrated with their own feedmill operations. The higher feed cost will then be passed down to the farmers, and subsequently the wholesalers.”

She points out that in this case, the wholesalers’ margins may be squeezed due to the capping in price but that should be offset by higher demand due to the festive season.

“The profitability of the companies in different markets will be largely dependent on the selling prices in the respective markets. Overall, we think that poultry prices should look better compared to last year, ” opines Ng.

It was reported recently that in April, the price of chicken at markets in the Klang Valley had surged by around RM1.50 to between RM8 and RM9 per kg.

Another bank-backed research analyst says that although the higher cost of raw materials for poultry feed would likely lead to higher working capital requirement to operate farms and reduced profitability on capital, Leong Hup and QL Resources would still deliver decent results year-on-year.

“These players are integrated and the bulk of their livestock segment revenue comes from feed sales, which operate on a cost mark-up basis. It is possible the feed sales would generate improved margins, as the inventory of feed that were bought at lower prices previously may be sold at a higher price when benchmarked against the current high prices, ” says the analyst.

The research analyst also believes the price increase of broilers (chickens raised for meat) across the region would be able to mitigate the negative impact from the poultry feed cost increase.

The analyst says the near-term outlook for the large-scale listed poultry companies is positive, as there are signs of recovery in social activities while the current undemanding share price valuations provide decent upside potential.

Recently, the Federation of Livestock Farmers’ Associations of Malaysia stated that the price of raw materials for poultry feed has risen at least 40% in the past one year, resulting in the higher cost of chicken.

Its president Tan Chee Hee said the price of corn per tonne had gone up by 41.3% from RM950 in January 2020 to RM1,300 in March this year, while the price of soya bean meal per tonne had increased by 57.6% from RM1,650 to RM2,600 during the same period.

The price of palm oil – which is added to the feed – increased by 43.3% from RM3,000 to RM4,300 per tonne, said Tan.

“The corn and soya meal used to formulate the feed is also imported, ” he said, adding that the surge in prices began in August last year.

“This time around, it is different as the prices have been going up for eight months. We have never seen this before. I hope the rakyat can understand that farmers are having a hard time.”

According to Tan, the cost of production for every kilogramme of live chicken is about RM6.

Meanwhile, a TA Securities Research report on the Malaysian poultry industry also notes that global prices of soybean and corn have picked up strongly since late August 2020, mainly due to strong China’s demand for robust feed requirements in the swine sector.

However, the report forecasts that the tightness of market supplies could be relieved soon, as planting is underway in Argentina and Brazil and the harvest is expected to come into the market by May or June.

Also, according to the United States Department of Agriculture, American farmers are expected to increase corn and soybean planted acreage by 5% in 2021, which may result in record annual production levels for corn and soybean.

“As for the 35% year-on-year (y-o-y) increase in soybean price and 22% y-o-y rise in corn price, we are not overly concerned as our back-of-envelope computation suggests that the double-digit increase in average selling prices (ASPs) of poultry products are sufficient in containing the higher commodity prices, ” says the TA Securities Research report.

The report also points out that based on a data set aggregated by Google, consumer mobility has begun to reverse towards the pre-pandemic level with visible improvement started since early February 2021.

As such, it is believed that ASPs of poultry products would improve this year following the successful rollout of Covid-19 vaccination programmes, which would quicken the recovery in economic activities including dine-in, corporate events and private functions.

“Moreover, from the supply perspective, we reckon small farmers with weaker financial health would have exited during the unprofitable period (in pandemic stricken 2020), ” says the report.

TA Securities Research is also optimistic about earnings for Leong Hup and QL Resources in 2021, which it believe would be higher than 2019 or pre-pandemic levels, driven by higher products’ ASPs alongside volume growth owing to their continuing investment and market share expansion.

“An upswing of ASP would be a boon to earnings of poultry players, given that, ceteris paribus, the increase in ASP of livestock product flows directly to the bottom line, ” says the report.

The research unit also notes that while the government sets a price ceiling for live chicken and egg during festive period to minimise profiteering activities, the ceiling price set are typically high and remain attractive for poultry players.

“For instance, during Hari Raya 2020, the government imposed a 14-day ceiling price of RM5.20 per kg on live chicken and 36 sen per piece on Grade A egg. These ceiling prices are significantly higher than 2020 average of RM4.65 per kg and 33 sen per piece respectively.”

Meanwhile, starting April 21 until May 20,2021 the ceiling price for a standard chicken has been set at RM7.90 per kg under the Festive Season Maximum Price Scheme for Hari Raya 2021, according to Agriculture and Food Industries Minister Datuk Seri Dr Ronald Kiandee.

TA Securities Research estimates that Leong Hup and QL Resources would see 2021 y-o-y earnings per share (EPS) growth of 61.2% and 12.6%, respectively, underpinned by an expansion in net profit margin of 0.8% percentage points y-o-y (to 2.5%) and 0.2% percentage points y-o-y (to 6%) respectively.

The research unit says surpassing pre-pandemic earnings level against consumer peers is unique to Leong Hup and QL Resources.