QL Resources plans price hike to mitigate impact of high input costs, says TA Securities

QL Resources plans price hike to mitigate impact of high input costs, says TA Securities
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KUALA LUMPUR (Aug 2): Agro group QL Resources Bhd plans to raise prices of its products to mitigate the impact of high input costs, which would help improve the group's margins in the coming quarter, according to TA Securities Research. 

Total revenue of the group's marine product manufacturing (MPM) segment declined 7% year-on-year (y-o-y) in the financial year ended March 31, 2022 (FY22), due to lower sales volume for all other activities, while margin erosion due to higher input costs and Covid-19 compliance expenses reduced profit before tax by 23% y-o-y.

“QL Resources intends to carry out price adjustment to mitigate the impact of high input costs, which we expect would help in improving margins in [the] coming quarter,” said TA in a note on Tuesday (Aug 2), following a recent analyst briefing by QL Resources. 

Nonetheless, TA said demand for QL Resources’ surimi-based products is expected to have improved in the first quarter ended June 30, 2022 (1QFY23), due to supply interruption from India, Vietnam and Russia. “In terms of growth, QL Resources’ frozen surimi-based product factory in Surabaya, with 12,000 MT capacity, is still under construction. The group also plans to increase aquaculture production from 2,000 MT to 6,000 MT in the next four years."

The company's business consists of integrated livestock (ILF), which contributes the majority of the group's revenue, followed by MPM, palm oil and clean energy and the convenience shop chain (CVS). The CVS segment in particular is categorised under ILF.

No impact from ceiling price and chicken export ban; Indonesia and Vietnam remain focus of expansion 

For the ILF segment, TA said the implementation of the ceiling price and export ban on broiler chicken had no impact on QL Resources, as the group had no broiler chicken operations in Peninsular Malaysia. 

“In 1QFY23, layer farming in Peninsula Malaysia continued to see recovery in demand amid tight supply,” said the research house. 

According to TA, the Indonesian market is expected to recover at a slower pace, while Vietnamese egg prices are expected to remain high as supply cannot yet meet the demand recovery. 

“The Indonesian and Vietnamese markets will remain [the] focus of expansion for QL Resources, as egg consumption per capita per annum [in the two countries] is still less than half of that in Malaysia.

Nevertheless, with global commodity prices softening in recent weeks, TA expects the group’s margin erosion to improve from 3QFY23.

On the other hand, TA said the group will focus more on clean energy and the water engineering, procurement and construction business, as part of its sustainable growth strategy. 

“In 1QFY23, the palm oil segment should have benefited from high crude palm oil prices and higher fresh fruit bunch production from seasonal lows in 4QFY22. The clean energy segment’s sales are expected to have improved, with substantial orders on hand, while profitability should continue to be adversely impacted by high material costs and the labour shortage beleaguering the nation,” the research house added. 

QL Resources currently operates 300 FamilyMart stores in Malaysia under its CVS segment. As 35% of sales from FamilyMart stores are ready-to-eat food items originating from its own central kitchen, the segment is more resilient against margin compression, TA noted. 

“We expect robust growth in sales in FY23 due to the lifting of Covid-19 related restrictions, while growth from FY24 will be driven mainly by the opening of new stores, rather than same-store sales growth. Upside potential comes from expanding into [the] Singapore market that has yet to have a FamilyMart footprint,” TA opined. 

The research house lowered its FY23 earnings forecast for the group by 2.7%, as margin compression would further hurt profitability in the first half ending Sept 30, 2022. However, TA raised its FY24 and FY25 profit forecasts by 5.2% and 14.2% respectively, due to increased sales in the MPM and ILF segments, and plans to open another 300 FamilyMart stores in the next five years.

“We apply a conglomerate discount of 10% on QL Resources' fair value to account for its diversified business segments. We maintain 'buy' on QL Resources, with lower discounted cash flow valuation of RM5.90/share,” TA added. 

At the time of writing on Tuesday, QL Resources was trading down 0.19% at RM5.19, giving it a market capitalisation of RM12.63 billion. 

Surin Murugiah