This article first appeared in The Edge Financial Daily on April 3, 2020

QL Resources Bhd
(April 2, RM7.90)
Maintain hold call with an unchanged target price (TP) of RM8.20 per share: Since the opening of QL Resources Bhd’s first FamilyMart outlet about three years ago, we understand the venture has already turned profitable. We are very positive on this finding given that QL initially expected the venture to take seven years to reach profitability. We see similarities between QL and Charoen Pokphand Foods Pcl (Thailand) (CP) which brought the 7-Eleven franchise to Thailand in 1989 before listing the company under the name CP All PCL in 2003. In 2019, CP All’s sales of RM73 billion eclipsed CP’s total sales of RM71 billion.

We keep forecasts unchanged. Despite being a consumer staple, we expect uncertainty surrounding Covid-19 to keep QL’s share price subdued, particularly given the expensive valuations the stock trades at. The TP is based on unchanged 50 times financial year 2021 (FY21) earnings.

FamilyMart currently has 180 operational outlets. While this is significantly fewer than its competitors such as 7-Eleven, MyNews and KK Mart, we estimate the profitability per outlet is significantly higher. We attribute this to higher average ticket amount, higher average customer count and skewed sales mix towards fresh food, which is a higher margin product.

QL intends to increase egg production capacities in Indonesia (to 1.4 million from 850,000) and Vietnam (to 1.8 million from 850,000) over the next four years. We expect egg consumption in Indonesia and Vietnam to continue to increase as both countries experience income growth (egg consumption in Indonesia increased from 60 eggs per person per annum in 2011 to 90 currently). Note that Malaysia’s current egg consumption tops 300 per person per annum. We are positive on these growth ventures as we are confident there is still room for growth in consumption for Indonesia and Vietnam. As QL is already a large poultry player, we see little execution risk in these ventures. Note that QL already produces about 5.7 million eggs per day (4 million of these in Malaysia).

QL, the 30th largest listed company by market capitalisation, will become eligible to be included in the FBM KLCI should it enter the top 25 or existing members fall below the 35th position or lower. We note that in late-FY17 when news broke that Nestle (Malaysia) Bhd was to be included in the KLCI, its forward price-earnings ratio rose from about 30 times to about 45 times. Should QL be included in the KLCI, we reckon it could see a rerating similar to Nestle. The KLCI is reviewed semi-annually, with the next scheduled for June. — Hong Leong Investment Bank Research, April 2