This article first appeared in The Edge Financial Daily on October 18, 2018
QL Resources Bhd
(Oct 17,RM6.96)
Upgrade to buy with a target price (TP) of RM8: We recently paid a visit to QL Resources Bhd’s (QL) Hutan Melintang plant, which houses the surimi, chilled and frozen surimi-based products and fish snacks operations. We also got a closer look at the newly completed and more efficient chilled and frozen surimi-based product plants, which will cater to the growing demand especially in the export market.
Marine Product Manufacturing (MPM) segment recovery. In addition to the increased capacity, gradual recovery in fish catch after a low cycle should provide steady earnings growth in financial year 2019 (FY19). We also flag the potential for margin expansion from improving product mix, with higher valued products such as surimi-based products, deep-sea fishing and aquaculture contributing more to MPM revenue. In the near term, any weakening of the ringgit against the US dollar is positive for MPM margins as exports account for more than 60% of MPM segment turnover.
We believe Family Mart remains an attractive platform for vertical integration and growth for QL in long term. We forecast that QL is on track to hit 90 stores by the end of FY19 and its target of 300 stores by FY22, and have a lot of room for growth judging by the saturation rate of convenience stores in Malaysia compared to other countries. We believe this is testament to their innovative product launches, which appeal very well to customers.
We have kept our FY19 forecasts relatively unchanged, but tweak our forecasts for FY20 onwards to reflect much stronger growth in store count and average ticket size for the Family Mart operations, supported by steady regional expansion in their other segments. Premised on our long-term upward revision in our forecasts, we upgrade QL to a “buy” with a revised discounted cash flow (DCF)-derived TP of RM8.
After making adjustments to our earnings forecasts and rolling forward our base year to FY20, we revise upward our DCF-derived 12-month TP to RM8 from RM5.90 previously, which implies a PE ratio of 51 times calendar year 2019 estimates.
Our base case DCF valuation of RM8 is based on 100 new store openings per year and average daily turnover of RM7,500 per store after reaching their target of 300 stores in FY22. In a bull case scenario, where new stores rise to 160 per year and based on an average daily turnover of RM10,500 per store, our DCF-derived 12-month target price rises to RM10.51.
Downside risks include a sharp decline in crude palm oil prices and/or the worsening of weather affecting palm oil activity segment revenue, disruption in capacity expansion for the MPM and integrated livestock farming segment, and more intense competition in the convenience store business affecting the footfall and average ticket sizes for the Family Mart business. — Affin Hwang Capital, Oct 17