QL, via wholly owned subsidiaries announced it has entered into a Sales and Purchase Agreements with related parties for the acquisition of four plots of land for a total cash consideration of RM48.7m. Gearing remains relatively unchanged. We keep forecasts unchanged as the mentioned capacity expansions are not expected to have a significant impact on earnings. Our unchanged TP of RM5.10 is pegged to 35x FY20 EPS of 14.6 sen.

NEWSBREAK

QL, via their wholly owned subsidiaries, announced it has entered into a Sales and Purchase Agreements with related parties for the acquisitions of four plots of land for a total cash consideration of RM48.7m.

HLIB’S VIEW

Neutral view on acquisitions. While capacity expansion in feed mill and poultry farming will result in better volumes for the group, QL still remains at the mercy of the volatile pricing of raw material import prices for its feed mill operations and local egg and poultry prices for its poultry production. Note that many regional players are expected to increase production capacity, which may result in oversupply in the long term. Furthermore, expansion of its central kitchen in Shah Alam is needed, given the growing number of FamilyMart stores, which currently stands at 76 stores nationwide. All in all, based on comparable transactions, the proposed prices are in line with market average value.

Impact on net gearing. As end of 1HFY19, QL had a net gearing of 30.0% and a net debt position of RM621.3m. After factoring in the RM48.7m cash consideration expected for these acquisitions, QL’s net gearing is marginally higher at 30.4%.

Forecast. We keep forecasts unchanged as the mentioned capacity expansions are not expected to have a significant impact on earnings.

Maintain SELL. We like QL for its diversified revenue streams and decent growth prospects. Despite this, we believe the share price has risen beyond justifiable levels with PE valuation in excess of 40x. Our unchanged TP of RM5.10 is pegged to 35x FY20 EPS of 14.6 sen.

Source: Hong Leong Investment Bank Research - 21 Dec 2018