The State of the Nation: Slow disbursement of subsidies hurts poultry players’ cash flow

TheEdge Mon, Jun 13, 2022 04:00pm - 1 year View Original

POULTRY players were left in limbo last week after the government decided to end subsidies for chicken breeders from July 1. They wonder whether the move will give them a free pass to raise selling price for chicken above the current ceiling price.

Already, poultry players are negatively affected by the slow disbursement of subsidies from the government, says a poultry veteran, who asked not to be named. It has affected his company’s cash flow at a time when the industry is faced with higher production costs.

“The disbursement of the subsidies has been slow. Until now, we have received only payment for February. We are still waiting for March to May payments,” he tells The Edge.

“We have to pay on the spot when buying feedstocks, but when we supply chickens to supermarkets, usually we get payments only two or three months later. Given the rising costs and slow subsidy payments, many companies are reeling from the cash-flow issue.”

Another poultry player says his company has just received the February payment.

While declining to disclose the chicken production cost, which could provide a better gauge on profitability, the poultry veteran says higher production volume will help ease margin compression. His supply price of standard chicken for supermarkets is fixed at RM5.90 per kg, against the maximum retail price of RM8.90 per kg.

To further mitigate cost pressures, the company will strengthen the downstream food processing business, he says.

With the surging production costs, an analyst with a non-bank-backed research house warns of downward pressure on earnings, though revenue is expected to rise.

“That’s why we are looking to revise downward the earnings forecasts for poultry companies under our coverage while maintaining a ‘neutral’ call for the industry.

“Some small poultry players were forced to close down because of elevated production costs,” the analyst says.

Exiting chicken-rearing business

This year alone, listed companies such as Sinmah Capital Bhd and LTKM Bhd have announced plans to divest their poultry business, owing to unfavourable market conditions arising from the low selling price of broiler chicken and the rising cost of poultry feeds.

Global commodity prices have skyrocketed since the end of last year, driven by pent-up demand from economic recovery and Russia’s invasion of Ukraine, which has further caused supply disruptions.

For perspective, feed costs constitute about 70% of chicken production costs. Corn makes up about 50% of feed costs, and soybean meal about 25%. Since last November, prices of corn and soybean meal have risen 40% and 28% respectively.

Hong Leong Investment Bank Research analyst Syifaa’ Mahsuri Ismail says the government subsidy is insufficient to cover elevated raw material prices and poultry players’ costs of doing business.

“Bigger poultry players will be able to ride through these challenges, however, given their financial resources and integrated capabilities. Small players would face pressure to break even, with the price cap in the increasing cost of production environment,” she tells The Edge.

She believes chicken production will not be disrupted, considering robust demand from consumers, following the full resumption of economic activities and the reopening of hotels, restaurants and cafés.

When contacted, Leong Hup International Bhd group chief financial officer Chew Eng Loke tells The Edge that he is confident the group will be able to overcome the current challenges, given that it has among the lowest production costs in the poultry industry. He assures customers that there will be no reduction in its chicken production.

Asked to comment on the chicken export ban, he says: “Our factories in Singapore rely on live broilers from Malaysia for processing. In the short term, we meet contractual obligations with our customers in Singapore using frozen inventories but we hope the export ban will be lifted soon, as some of our customers have been with us for more than 20 years and they prefer freshly processed chickens. If we lose these long-term customers, the impact on our Singapore operations can be material.”

Poultry firms with retail outfits faring better

Looking at the financial performance for the quarter ended March, poultry farmers with retail outfits are in better shape than those with none. QL Resources Bhd, for example, registered a 16.1% quarter-on-quarter (q-o-q) increase in net profit to RM69.39 million for 1QFY2022. Its integrated livestock farming sales rose 5% on the back of higher sales from FamilyMart operations, benefiting from the pent-up surge in demand after reopening of all economic sectors.

In a May 31 note, CGS-CIMB Research even raised its FY2023/24 earnings per share by 1.5%, to 4.6%, to account for better contribution from the poultry segment.

It says: “We expect QL to post stronger results in FY2023 (33.3% growth in net profit). This will be driven by a pickup in economic activities and consumer footfall arising from the easing of lockdown measures, generating higher demand for its products across all its business segments. Despite higher input prices, we believe QL can mitigate its impact on margins via better cost control and greater economies of scale.”

Similarly, supported by the retail profit of RM11.8 million against a mere RM1.4 million from the poultry segment, Sarawak-based CCK Consolidated Bhd’s net profit was up 55.2% q-o-q to RM11.13 million. As at end-March 2022, it had three supermarkets, 63 retail stores and six wholesale stores.

Lay Hong managed to rake in a net profit of RM18.93 million in 1QFY2022 against a net loss of RM8,000 in 4QFY2021, thanks to higher selling prices of livestock.

In contrast, CAB Cakaran Corp Bhd — which recorded a small contribution from its supermarket division — suffered a 63.2% q-o-q drop in net profit to RM6.69 million for the January-to-March 2022 period, owing to lower production of chicks and lower trading volume of feeds as well as the lower average selling price of broilers.

In its financial statement, it elaborated that the ceiling price move has caused many farmers to cease production, resulting in the current shortage of chicken in the market.

Leong Hup also saw a 46.4% q-o-q decline in net earnings to RM20.38 million in 1QFY2022, owing mainly to an increase in raw material costs of livestock feed production.

Based on Bloomberg’s consensus target price of 59 sen, however, Leong Hup still offers upside potential of 10.3%; and CCK Consolidated, 16.7%, based on a target price of 70 sen.

Major poultry stocks on Bursa Malaysia have enjoyed positive returns in terms of the share price performance year to date, with QL Resources leading the gain at 14.4%.

Within the region, Leong Hup’s listed Indonesian unit PT Malindo Feedmill Tbk posted lower net income of IDR10.5 billion (RM3.2 million) in 1QFY2022 against IDR36.3 billion in 4QFY2021. No price control on chicken prices is imposed in Southeast Asia’s largest country.

There has been a freeze, however, in the price ceiling on chicken in Thailand since mid-January this year. The Thai Broiler Processing Exporters Association earlier forecast shipments to expand to 950,000 tonnes this year from 930,000 tonnes in 2021, taking advantage of Malaysia’s chicken export ban that came into effect on June 1.

Food conglomerate Charoen Pokphand Foods Pcl, owned by the billionaire Chearavanont family, has flagged the adverse impact from raw material headwinds. This caused its net profit for the first quarter to come in 58.2% lower at THB2.84 billion (RM364 million) versus THB6.79 billion in 4QFY2021.


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