• We recently visited QL Foods surimi plant in Hutan Melintang. Overall, the outlook for the MPM segment is positive due to better fish landings in the new fishing season, increased fishmeal sales, and stable demand for surimi-based products.

• The expansion plan to increase the capacity of surimi products in Surabaya and Hutan Melintang, along with prawn aquaculture, will play a significant role in bolstering QL's long-term earnings growth, in our view.

• Maintain a BUY call with SOP-derived TP of RM6.30, which implies FY24F PER of 41x.

The key take-aways from this visit/meeting are highlighted below.

Vertically Integrated Surimi Manufacturer.

QL Foods was established in 1994 as a subsidiary of QL Resources, categorized under the Marine Products Manufacturing (MPM) division. It is strategically situated within Peninsular Malaysia's largest fisheries village, Hutan Melintang, Perak. Notably, the QL Foods surimi plant holds the distinction of being Malaysia's pioneering vertically integrated surimi manufacturer. Equipped with a state-of-the-art automated downstream production line, it produces both surimi and surimi-based products (chilled and frozen) with a daily output ranging from 100-140MT. The company's reliable source of fisheries supplies stems from the local community, which boasts over 500 fishing boats, thus eliminating the necessity for QL to maintain its own fishing fleet here. Spanning approximately 24.7 acres, the Hutan Melintang facility encompasses factories dedicated to surimi, frozen surimi-based products, chilled surimi-based products, and dried snacks which operate at circa 90% utilization rate. QL exports surimi and frozen surimi-based products to various countries, including China, Indonesia, Japan, Singapore, Australia, Hong Kong, Europe, Brunei, and the United States. These exports constitute about 50% of the company's total revenue, according to management. Meanwhile, the chilled surimi-based products primarily cater to the domestic market.

QL's surimi plant showcases a notable level of automation through the integration of robots/machines to handle specific manual tasks such as packaging and heavy lifting. However, a challenge arises when attempting to automate the fish head cutting process, due to the varying sizes of the fishes. Currently, this remains the sole aspect for which QL has not implemented automation.

Harnessing Synergy in Fishmeal Production for Sustainability

QL Fishmeal, located alongside QL Foods, capitalizes on a synergistic approach to minimize waste generated during the procurement of fresh marine fish. Through innovative "steam-drying" technology, they efficiently process smaller fish and unused components like heads and guts, creating premium fishmeal with excellent digestibility. Meticulously adhering to a strict 24-hour processing timeframe for incoming raw materials, the plant ensures the optimal freshness of the fishmeal. QL exports this high-quality fishmeal to international markets, where it is predominantly utilized as aquaculture feed and animal feed by livestock farmers.

Accelerating Expansion Opportunities in the MPM Segment

QL plans to construct a new state-of-the-art surimi-based production plant on the recently acquired 200-acre land adjacent to the existing Hutan Melintang facility, with a CAPEX budget of RM400-500m for the initial 5 years phase. At present, the application for a separate land title has been approved and is currently pending final approval from the Economic Planning Unit. In terms of surimi production in Surabaya, the facility is currently fully utilized, and the new frozen surimi-based products factory in Surabaya is on track to commence commissioning in the 4QFY24. This upcoming factory will boast a capacity of 12K and a projected CAPEX allocation of RM50m over the next 3 years. Additionally, the company aims to capitalize on local prawn resources to enhance its earnings. Alongside the new prawn farm in Kota Belud (presently under construction), the prawn aquaculture production capacity is set to triple from 2,000MT to 6,000MT per month within the next 4 years, with CAPEX of RM40m. Currently, local prawn annual production stands at 30,000 MT vs 150,000 annual consumption. At 2,000 MT/month, QL already holds c.80% market share in prawn production.

Positive MPM Segment

According to management, QL is poised to benefit from the El Nino phenomenon, as fishes are likely to stay near the surface during hot weather (and vice versa), thereby improving fish landing. As of the current date, the fish landing in this new fishing season appears to be better than the preceding year's season. This improvement will aid the division’s expansion efforts and supporting the stable demand for its surimi-based products. As for fishmeal, we anticipate a higher demand and increased prices due to strong demand from aquaculture activities and absence of additional supply from Peru during its recent fishing season. Overall, we expect the MPM division's outlook to remain positive, with a projected revenue growth of +17% YoY in FY24f.

Optimistic QL’s Earning Prospect

We are optimistic on QL’s FY24 earnings prospect on the back of its defensive nature and diversified revenue base as well as improvement in core business given that operations have normalised with demand remain stable. High input costs are the only concern, though we believe the group will be able to pass the additional costs to consumers to defend its margins. We estimate that QL’s FY24f PBT margins will improve by 0.4ppts YoY to 8%, as operating conditions normalize across its various business units.

Maintain a BUY call with TP of RM6.30

We have a BUY call on QL with unchanged SOP-derived TP of RM6.30, which implies FY24F PER of 41x. We continue to like QL due to i) its strong brand name with stable earnings track record, ii) defensive nature of its businesses, and iii) high compliance to Halal standards.

Source: BIMB Securities Research - 17 Aug 2023