Summary
PWF is an integrated poultry player, encompassing a vertically integrated structure from feed production to breeding of day-old chicks (DOC), broiler and egg farming.
Core earnings are expected to accelerate on the back of lower feedmill cost and higher chicken prices.
PWF is valued by pegging its FY25F core EPS of 15.2 sen to PE of 8.0x, leading to a FV of RM1.22 (38.6 % potential upside from current price).
Investment Highlights
Resilient and rising chicken prices are expected to boost earnings. As part of the national food security initiatives, the Malaysian government has abolished price controls and subsidies for chicken, a move touted to be positive development for producers like PWF. The move allows broiler farmers greater flexibility to adjust prices in response to changing market conditions. For instance, chicken prices have fluctuated from RM5.90/kg in Q4 2023 to RM6.50/kg in Q1 2024 and reached as high as RM7.00/kg in Q2 2024.
Cost normalisation results in better margin. The prices of soybean and corn, a major inputs for feed, have declined due to favorable global supply conditions. As feed costs constitute c.70% of PWF's production expenses, any changes are expected to impact margins. Reduction in cost pressure on these commodities prices benefits PWF's feedmill operations, leading to reduced input costs. With stability in chicken selling prices and lower feed costs, we expect PWF to achieve better margins in the coming quarters.
Industry dynamic to benefit large farm long term. Amid the changing competitive environment and advancements in farming technology, coupled with state government initiatives to transition farms to closed-coop systems, we foresee broiler production players are gradually adopting these changes. The move requires substantial CAPEX, likely leading to the shutdown of smaller and less profitable farms as well as consolidation into fewer, but larger players. Larger-scale players like PWF are poised to benefit from this trend, as reduced overall supply will support chicken prices. Additionally, further M&A opportunities for PWF to expand its capacity are on the cards.
Attractive dividend. The Group has consistently maintained a dividend payout ratio averaging 30-40% of their net profit over the years. Going forward, we expect a decent dividend pay-out, supported by anticipated stronger bottom line and cash inflows from government egg subsidies. Our forecast suggests a dividend yield of 5.1% and 5.7% in FY24F and FY25F respectively.
Table farming. The Malaysian government has maintained subsidies for table eggs at RM0.10/egg, and PWF expects to receive RM25-30m subsidies in 2024 based on current capacity. Despite a RM0.03 reduction in the price ceiling for table eggs, we believe this impact will be mitigated by lower feed costs. Additionally, PWF plans to expand the output of functional eggs from 5% to 20% of their current layer farm capacity. With growing awareness over the benefits of functional foods, functional eggs, which are not subject to government price controls and command c.50.0% better pricing than table eggs. This will likely enhance earnings and margins contributions from this segment.
Valuation & Recommendation
We favour PWF for to its position as a pure-play integrated poultry company supported by in-house feedmill plant, positioning as a direct beneficiary of low commodity prices and higher chicken prices.
Our target price of RM1.22 is derived by applying a P/E multiple of 8.0x to the FY25F core EPS of 15.2 sen. The assigned P/E is in line with the peer forward PER.
Our earnings valuation excludes the forecasted subsidies expected to be received from the government.
The assigned PER also reflects our positive outlook on PWF, anticipating strong earnings growth in the coming quarters driven by improving margins.
Disclaimer
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Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.449296 | 4.484012 |
| EUR | 4.692599 | 4.701308 |
| CNY | 0.615732 | 0.616932 |
| HKD | 0.571606 | 0.576092 |
| SGD | 3.310067 | 3.336427 |