QL Resources Bhd
(Nov 21, RM3.46)
Maintain “outperform” with target price (TP) of RM3.85: QL Resources’ results for the first half of financial year 2015 ending March (1HFY15) are on track, meeting 49% of our revenue and 44% of our earnings estimates for FY15. Revenue was RM656.5 million (+10.6% year-on-year [y-o-y] +0.5% quarter-on-quarter [q-o-q]) and earnings gained RM48.2 million (14.7% y-o-y, 19.4% q-o-q). The group’s steady performance reaffirms our “outperform” recommendation on QL with a TP of RM3.85 derived from our sum-of-parts approach. We believe the group’s 2H results will improve further, driven by increasing contributions from its aquaculture operations.

Management continues to be optimistic that 2HFY15 will perform owing to: (i) recovery in regional farm produce prices; (ii) better fishmeal prices; (iii) festivity effect and traditionally the next two quarters are higher performing.

We see QL’s ongoing growth strategies coupled with reputable branding continuing to uplift its performance. Sales grew 14.4% y-o-y due to higher contribution from surimi (fish paste) based production and Indonesia’s fishery operations. New contributions from shrimp farming (aquaculture) coupled with better fish catch off the east coast of Peninsular Malaysia further enhanced earnings. The group has begun exporting its shrimp products to South Korea, Japan and China and targets to produce about 600 tonnes per year — 700 tonnes per year of shrimp by end-calendar year 2014 (CY14). We believe the group has also secured a 25% higher selling price which will boost earnings going forward as production increases.

Revenue increased 20.2% y-o-y from higher fresh fruit bunch (FFB) processed and increasing FFB output from its Indonesia oil palm operations of about 8,000 tonnes per month of FFB. Higher contributions from associate Boilermech furthermore lifted earnings despite QL’s Indonesian operations still incurring marginal losses from its new plantings. We are positive on the performance of palm oil activities as the losses from Indonesia’s oil palm should not weigh down the division going forward as more plantings mature.

Cumulative sales rose 7% from higher volume of feed raw materials traded and higher sales contribution from poultry operations. Earnings improved from higher farming margins in both its Malaysia and Vietnam operations, albeit being dragged down by lower first quarter Sabah and Sarawak and regional poultry operations.

QL’s growth will be supported by: (i) ongoing marine products manufacturing capacity expansion materialising and extending to aquaculture projects which would see higher contributions from 2HFY15; (ii) integrated livestock farming — expansion of existing poultry farms in Malaysia, Indonesia and Vietnam (450,000 to 750,000 egg prododuction per day as well as building feedmill capacity in Indonesia; and (iii) higher FFB of at least 100,000 tonnes per year expected to be processed in FY15F. — PublicInvest Research, Nov 21

This article first appeared in The Edge Financial Daily, on November 24, 2014.