We met with QL Resources management and came away from the meeting feeling neutral about the group’s prospects going forward. QL will continue to grow egg production capacity in Malaysia and Vietnam operations. Family Mart is expected to break even by mid FY20 with a base of 110 stores. After factoring in better profitability in the Family Mart division and increased egg production, we raise our FY20/21 forecasts by 3.4% and 4.3%. After adjusting our earnings and PE multiple, our TP rises from RM5.10 to RM6.00 based on PE of 40x.

We met with QL Resources management and came away from the meeting feeling neutral about its prospects going forward.

Integrated Livestock Farming (ILF). QL will continue to ramp up egg production capacities in key markets. QL expects to double egg production in their Vietnam poultry layer unit from 850k to 1.85m eggs per day within 3 years. We are positive on this as we expect egg consumption in Vietnam to grow from its booming economy. Note that Vietnamese people consume just 90 eggs p.a. on average compared to 300 eggs for Malaysia. Domestically, the recently completed poultry unit in Raub, Pahang is expected to add 650k eggs to QL’s already burgeoning egg production capacity of over 5m per day.

Marine Processing Manufacturing (MPM). QL’s fish ball and surimi processing remain at the mercy of fish catches, which is greatly affected by weather conditions. In order to mitigate this risk, QL has turned to prawn aquaculture production, which are being sold to Australia, China and Japan markets. While this ventures’ contribution to QL’s top line is not sizeable at this time, we are positive on it as it reduces QL’s dependency on fish landings.

Family Mart venture. We are greatly encouraged by the performance of QL’s Family Mart venture. We expect Family Mart to achieve economies of scale sooner than expected and break even by mid-FY20 at an estimated store count of 110. Currently, Family Mart has 85 operational stores, which is expected to rise to 90 by end-FY19. We expect the group to open an average of 5 stores per month going forward. The superior profitability of Family Mart compared to its rivals is driven by (i) higher average ticket amount of over RM10 (vs less than RM7 for its rivals), (ii) higher average customer count and (iii) skewed sales mix toward fresh food, which is a relatively higher margin product.

Palm Oil Activities. QL’s oil palm estates are hitting increasing maturity, with currently over 80% of palms in the prime years of yield. Note that FFB production is expected to be significantly higher in FY19 (approximately 145,000 MT) than in FY18 (127,000 MT). However, we expect the better FFB production to be mitigated by depressed CPO prices in CY19 (after averaging RM2,591/MT in FY18). HLIB expects CPO to average RM2,300/MT in CY19.

Forecast. After factoring in better profitability in the Family Mart division (we previously expected between 6-7 years to turn profitable) and increased egg production, we raise our FY20/21 forecasts by 3.4% and 4.3%.

Maintain SELL. We like QL for its diversified revenue streams, seasoned management team and decent growth prospects. Despite this, we feel that share price has risen beyond justifiable levels with PE valuation of approximately 50x. Nonetheless, noting QL’s favourable outlook, we raise our PE multiple from 35x to 40x pegged to +1SD above 5-year mean PE. After our earnings and PE adjustment, our TP rises to RM6.00 from RM5.10 Based on FY20 EPS of 15.1 Sen.

Source: Hong Leong Investment Bank Research - 14 Mar 2019