Highlights

• From a fishmeal and raw feed meal trading company, QL has ventured into various related segments, including Marine Product Manufacturing (MPM), Integrated Livestock Farming (ILF), Palm Oil Activities (POA) and recently, FamilyMart convenience stores

• MPM division charted steady revenue growth (FY12-FY16 CAGR: 15%) due to production capacity expansion and increase in PBT margin (13.8% in FY12 to 19.6% in FY16) on the back of mechanization of surimi and fishmeal processing and historically low diesel price used in fishing vessels.

• Building of broiler farms and poultry plants will gradually increase capacity for production and hence revenue in ILF division, which is expected to account for 62% of FY17 total revenue.

• Egg prices in FY17 are expected to rebound to 30 cents/egg after bottoming at 27 cents/egg in FY16.

• Huge synergies between ILF and MPM division as fishmeal is used as animal feed.

• Increasing acreage of oil palm plantation entering mature stage in life cycle will add to FFB production.

• FamilyMart to roll out 300 stores within the next five years with the first expected to be operational by year end.

• FamilyMart business model of offering numerous Ready-To-Eat products to be differentiating factor against established players.

• Expansion of Malaysian middle-class population and low convenience store penetration ratio (number of convenience stores per million people) in Malaysia indicates room for growth. Risks

• FamilyMart’s inability to differentiate itself from established convenience store players.

• Occurrence of El-Nino will impact ILF productivity due to heat stress as well as reduce FFB output in POA business segment.

Forecasts

• Net income is anticipated to grow 15% yoy to RM221m after stagnating in FY16 at RM192m mainly from lower than expected egg selling price in the ILF division.

Rating

Initiate with HOLD, TP: RM4.40

• QL has solid fundamentals with decent growth potential due to expansion of capacity in its MPM and ILF division through commencement of various processing plants as well as maturing of plantations in the POA division. Despite this, we infer that these factors are already priced into the market and the stock is fairly valued.

• The contribution from QL’s recently announced convenience store venture, while viewed as a positive move with various synergies to the group, is not factored into the valuation as it will take several years of gestation before turning profitable.

Valuation

• Initiate with a HOLD with a TP of RM4.40 based on a PE(x) valuation of 25x FY17 earnings.
• While QL is a well run company with strong fundamentals, robust growth track record, and diversified revenue streams, we believe the stock is fairly priced at current levels.

Source: Hong Leong Investment Bank Research - 6 Oct 2016