• Following our meeting with QL, we are convinced that QL’s long-term prospect remains promising with positive factors driving key segmental growth on all front. We conclude that QL remains a fairly safe consumer stock to hold for the long-haul.
• Given the optimistic medium-to-long term view owing to recovery in the overall demand and supply chain, we reiterate HOLD call for QL with SOP-derived Target Price of RM6.00.

The key take-aways from our meeting with management are:

• Although QL expects the coming quarters to remain challenging, barring further unforeseen events coupled with faster and higher vaccination rate, business performance will stage a recovery in 2HFY22 – as resurgence of Covid-19 cases has led to disruption in business and operating activities with tighter SOP and delay in expansion project in 1HFY22.
• Capacity utilizations are back to 80% with more than 90% of its workers in all pillars are vaccinated.
• MPM’s 1HFY22 performance is slightly negative due to supply chain disruptions although demand for frozen seafood and surimi-based products remains good and stable. Nonetheless, there is positive outlook for 2HFY22 – the only risk is unforeseen drastic surge in regional Covid cases that could continue to affect supply chain.
• ILF outlook for 1HFY22 is negatively mixed due to thin margins on higher feed cost (maize and soybean meal), nonetheless, management expects performance to improve in 2HFY22. Profit margin for eggs in Peninsular Malaysia is severely hurt by higher feed costs, and compounded by oversupply situation on declining demand due to resurgence of Covid-19 cases that impacted HORECA business. Conversely, East Malaysia eggs price is better off due to pass through cost mechanism taken.
• QL intends to dispose its palm oil division given the company is focusing on sustainable solutions to cater towards increased awareness in ESG initiatives i.e., focusing in clean energy sector namely bioenergy, water treatment and solar energy in Boilermech.
• FamilyMart continued on its charted progression towards having 300 stores by FY2022 – as at Mar 2021 QL has opened 241 stores while as of 1st Sep 2021 about 251 stores have been in operations. The second central kitchen, currently under construction is expected to be completion in Dec 2021 to support an additional capacity of 500 stores. The existing central kitchen is to cater/support for 300 stores. Overall, despite the high Covid-19 cases and MCO affecting foot traffic and sales, QL is still optimistic on the performance and contribution from the FamilyMart business.
• Looking ahead, QL is focusing on 3 strategic growth themes to drive its long-term value creation i.e., 1) replicate core activities and value chain in neighboring SEA markets to provide buffer and potential growth to its existing business, 2) strengthening value chain through upward and downward integration to strengthen competitive position, and 3) focus on consumer food business expansion i.e., convenience stores.

Our View – QL offers a unique consumer proposition

We believe QL would continue to attract high valuation due to: 1) its excellent track record of growing both revenue and profit; 2) consumer-driven business which is regarded as recession-proof; 3) its status as one of the largest marine product players in Asia; and 4) its high compliance to ESG and Halal standards which will continue to attract global funds. The catalyst for future growth will be driven by 1) stable demand for its marine products; 2) stable margins from ILF once supply/demand situation normalise especially in Peninsular Malaysia, 3) better margin from POCE segments on account of higher ASP of palm products; and 4) expansion of FamilyMart business.

Maintain HOLD with TP of RM6.00

Reiterate HOLD on QL Resources with unchanged SOP-derived TP of RM6.00 and earnings forecast. We believe this is a fair valuation in view of its sustained earnings growth, as well as its dominant position as the largest local halal food producer that caters to basic consumer food market with inelastic products demand.

Source: BIMB Securities Research - 2 Sept 2021