QL Resources Bhd is back on the acquisition trail and this time, it is aiming for businesses in the region. After having held back from making any acquisitions in the last nine months, QL, an agro-based group, is eyeing poultry farms in Indonesia and Vietnam, and plantation land and palm oil mills in Indonesia, among others.

“The time is now ripe for further aquisitions as the volatility in the credit market since the end of last year has subsided. Opportunities for agro-based businesses in the Asean region are great, and we are in a good position to take advantage of that,” says the company’s managing director Chia Song Kun.

While not neglecting organic growth, acquisitions have served the company well in the past. QL has seen its poultry and livestock division grow by more than 100% in the past four years, after taking over previously loss-making poultry farms in Kulim and Kuching. The company currently produces 2.2 million eggs per day, compared to just 800,000 four years ago.

Between 2003 and 2007, QL purchased a 75% stake in a plantation project with its Indonesian partners. The plantation, measuring 50,000 acres in Tarakan in eastern Kalimantan, Indonesia, enabled QL to diversify into oil palm. The company has plans to triple its plantation division’s contribution to 30% of pre-tax profits by 2014.

Prior to its expansion into Indonesia, QL owned about 3,000 acres of oil palm plantation in Sabah, but the bulk of the revenue from its palm-based division then came from palm oil milling.

Chia says QL typically allocates around RM150 million annually for capital expenditure, but he expects a lower figure of RM120 million to RM130 million this year. A comfortable acquisition expenditure should be within the RM40 million to RM50 million range, he adds.

QL is working towards setting up a poultry egg farm in Vietnam, where it aims to have a production capacity of between 500,000 and one million eggs daily. “We are working on about 50 acres of greenfield land and work is expected to start this year,” Chai says.

In a recent report on QL, RHB Research analyst Hoe Lee Leng says even though the company’s palm oil segment contributed less than 20% to total revenue and 10% to its profit before tax in FY2009, ended March 31, there is potential growth from this segment when more of its oil palm trees in Indonesia start to mature in 2012.

Hoe expects RM50 million to RM60 million to be spent annually for this segment in the next two years, partly to pay for the RM87.5 million plantation development costs, to be spread over six years, and for the construction of a crude palm oil (CPO) mill in Indonesia.

While the livestock and marine divisions are expected to remain the main earnings drivers for the group, its aggressive expansion into the plantation sector could be hit by a decline in palm oil prices, as uncertainty in demand and increasing stocks continue to plague the industry.

CIMB Research, in a recent report on the plantation sector, says the first seven months of 2009 has seen CPO prices dropping by 36% to average around RM2,208 per tonne compared with last year. Prices could trend lower in 3Q2009.

QL also operates a fleet of more than 17 trawlers. It is Malaysia’s largest producer of surimi or fish paste which is used as a basic ingredient for fish-based food products. It also produces fish meal mixture for livestock feed and fish feed, and distributes frozen fish.

The company is a major distributor of livestock feed with an 18% market share in Malaysia and a leading egg, broiler and breeder producer, holding a 10% share of the egg market.

QL’s revenue and profits are generated from two major segments. Its integrated livestock farming and marine products manufacturing division contributed 57.6% and 23.2% respectively of total revenue of RM1.4 billion, and 49.1% and 40.9% respectively of profit before tax, totalling RM160 million in FY2009.

For FY2010, QL’s earnings are expected to grow 5% to 15%.

Some of the risks in QL’s growth strategy include increases in raw material prices, significant changes in the CPO price trend, foreign exchange volatility risks due to its  increasing overseas contribution, and aggressive growth that may strain its balance sheet, analysts say.

However, QL’s healthy financial position should help the company cope with the risks that come with cross-border expansion. Its net gearing stands at a comfortable 0.2 times. In addition, its net interest cover, inclusive of short-term debts, is at a comfortable 7.8 times in FY2009.

“We are not too concerned about the net gearing level. The bulk or around 57% of its total borrowings are short-term in nature, mainly banker acceptances for its working capital requirements,” says RHB Research’s Hoe.

According to Chia, QL is in an evergreen industry. He remains confident that the path chosen by the company will see it soaring to new heights. “We believe earnings and growth has seen tangible results from our expansion drive without compromising our financial position, as we have the necessary expertise and proven  track record,” he says.

This article appeared in The Edge Malaysia, Issue 769, Aug 24-30, 2009.