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This article first appeared in The Edge Financial Daily on September 25, 2018

QL Resources Bhd
(Sept 24, RM6.34)
Maintain neutral with an unchanged target price (TP) of RM4.68:
We recently visited one of QL Resources Bhd’s marine product manufacturing (MPM) plants in Hutan Melintang, Perak, operated by its subsidiary, QL Foods Sdn Bhd. The MPM division contributed 27.7% and 48.6% of the group’s revenue and profit before tax (PBT) respectively for the financial year ended March 31, 2018 (FY18), while Hutan Melintang plants contribute more than 30% (around RM300 million) of the MPM division’s revenue and 35% of QL’s overall MPM segment capacity.

Frozen surimi-based products account for about 50% of QL Foods’ revenue, with 30% for exports and 70% for locals.

QL has recently expanded the surimi-based production capacity of the Hutan Melintang MPM unit by about 27,500 tonnes per year. The works on its new chilled and frozen surimi-based product plants with respective capacities of 12,500 tonnes per year and 15,000 tonnes per year were completed in March 2018, with expected contributions to FY19 earnings. With the new plants, the total capacity of the Hutan Melintang plants has increased to 60,000 tonnes per year. The group plans to invest in a new frozen surimi-based product plant in Surabaya, Indonesia, in FY19 and increase aquaculture production capacity from the present 1,500 tonnes per year to 5,000 tonnes per year in the next five years.

Recall that QL’s MPM PBT margin slipped to 13.7%, the lowest since FY10, as a result of the post-El-Nino low fish catch cycle in FY18. The expected recovery in the fish cycle, coupled with the ramping up of new capacity, should improve the MPM segment in FY19.

We maintain our earnings estimates and discounted cash flow-based TP of RM4.68. While the stock currently trades at +3 standard deviation of its five-year historical average, we maintain our “neutral” call as the group’s fundamentals remain strong and resilient.

Its feed mill raw material trade saw slightly lesser competition as small players in the market were not able to survive continuous margin squeezes. In addition, a stronger US dollar is benefiting the group due to higher unit value of raw materials and hence higher sales value.

Meanwhile, the integrated livestock farming segment’s expansion mainly focuses on: i) ramping up the production of its commercial feed mill in Bekasi, Indonesia, to 15,000 tonnes per month; ii) a plan to build a second commercial feed mill in East Java, with similar capacity as the one in Bekasi; and iii) the acquisition of another piece of land to double its egg production in Vietnam given the rising demand for eggs in the country.

The group expects a moderately bearish outlook for the palm oil activity segment. In addition, the adoption of Malaysian Financial Reporting Standards 141 (Agriculture: Bearer Plants) which requires depreciation of bearer plants is expected to have a slight negative impact on the segment’s bottom line. This segment’s medium- to long-term growth will be supported by growing palm maturity of its Indonesian plantations.

QL aims to open 50 convenient stores in FY19 for a total of 89 stores. It now has 64 FamilyMart stores across the Klang Valley (25 stores in FY19), achieving 50% of its FY19 store opening target. While the operations are still in the gestation phase, the group has said the actual performance in terms of key store operating key performance indices is meeting expectations. — PublicInvest Research, Sept 24

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