We came away from our recent meeting with management, feeling positive on QL’s future prospects, as we are confident the Marine Product Manufacturing (MPM) and Family Mart (FM) operations would continue driving earnings growth. While the spike in soybean and corn prices will affect the Integrated Livestock Farming (ILF) segment, we think that government’s subsidy and recovery in demand for poultry products should help to partly cushion the impact. The Palm Oil & Clean Energy (POCE) is expected to remain profitable, on the back of the stronger CPO prices. Additionally, we think that QL’s valuation has turned attractive, as it is currently trading at c.48x forward PE, which is near -1SD of its 3-years historical average (see Figure 1). All told, we maintain our Outperform call and TP of RM5.30.

• Marine Product Manufacturing (MPM). We expect 4QFY22 earnings to be weaker on a QoQ basis due to seasonal factors. QL has allocated RM400m capex for the next 5 years to build a new surimi-based products plant in Hutan Melintang, mainly to cater for the strong demand for surimi-based products, supported by the growth from its Family Mart operations. QL has also earmarked RM80m to increase its prawn aquaculture capacity from 2000mt to 6000mt.

• Delay in store opening target. Earlier, QL has targeted to open 300 FM stores by FY22 but this has been delayed to 1QFY23 due to Covid- 19 related SOPs. To date, Family Marts store count is at 279 outlets and 14 FM mini vending machines. QL will also continue to rollout more FM mini’s in Shell stations and are currently in discussions to include hospitals, condominiums and office buildings as potential locations. Family Mart’s second central kitchen is expected to complete in 1QFY23, with an additional capacity to cater for another 500 stores. While FM’s footfall has been encouraging since the reopening of economy, we understand that it has recovered back to only 70-80% of its pre-pandemic levels, mainly affected by the shorter operating hours. Nevertheless, we think that the new store openings will continue to spur earnings growth.

• Convenience Store (CVS) is expected to be disclosed as a separate segment in 4QFY22. As per Financial Reporting Standards requirement in order to be disclosed separately, it should contribute at least 10% of the group’s total sales. Based on our estimates, FM is expected to contribute c.RM400m-RM500m to the group’s total sales. Note that QL’s total revenue in FY21 was at RM4.38bn.

• Integrated livestock farming (ILF). The raw material trading should continue to benefit from the elevated feed cost, as we understand that QL is able to pass on cost due to the inelastic demand. However, the rising feed cost will negatively impact QL’s poultry operations. Corn and soybean prices have increased by c.26% and c.27% YTD. Despite that, we believe that the segment is poised for a further recovery going forward, mainly premised on the recovery in egg prices regionally while government’s subsidy that should help to partially cushion the spike in feed cost.

• Palm Oil and Clean Energy (POCE). We think that the negative impact on Indonesia’s 20% mandatory domestic sales policy will be partly cushioned by the stronger CPO prices and the resumption in Boilermech’s project work which was affected by the MCO order previously.

Source: PublicInvest Research - 2 Mar 2022