THE price control mechanism mooted recently by the Government to combat high poultry prices is negative for both the poultry sector and poultry-related stocks.
This is in view of pricing competition from imported chicken while caps to selling prices will lead to margin compression, according to CGS-CIMB Research.
“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,” justified analyst Walter Aw in a consumer sector update.
“Also, allowing imports of whole chickens from overseas (beyond a short-term period of three 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.”
Elaborating on the matter, CGS-CIMB Research said the trend of rising poultry selling prices are due to (i) higher feed cost prices (corn and soybean meal price rose 30.9% year-on-year [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 against the greenback.
To re-cap, the Government has announced measures to mitigate the impact of high poultry prices on consumers by taking the following measures:
- Maintaining the ceiling selling price of chicken eggs under the Malaysian Family Maximum Price Scheme (Feb 5 to June 5, 2022);
- Lowering the ceiling selling price for whole chickens to RM8.90/kg (from RM9.10/kg);
- Allowing all approval permit (AP) holders to import whole chickens (vs certain parts previously); and
- Opening up APs for hypermarkets to import chicken with plans to provide subsidies for poultry producers to lower farm selling prices.
All-in-all, CGS-CIMB Research retained its “neutral” call on the overall consumer sector while reiterating its “add” rating on poultry-based QL Resources Bhd and CCK Consolidated Holdings Bhd.
“Despite near-term headwinds, we are of the view that both stocks will be less affected compared to its other peers,” CGS-CIMB Research pointed out.
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, the company 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. – Feb 8, 2022
