We visited QL’s MPM processing unit in Hutan Melintang and came away feeling positive about the group’s prospects going forward. QL intend to increase MPM production capacity by ramping up aquaculture production and expanding its deep sea fishing fleet. Our TP of RM6.00 (based on 40x FY20 EPS of 15.1 sen) and SELL call remain unchanged, as market valuation appears overly rich, in our opinion.

We visited QL’s MPM processing unit in Hutan Melintang and came away feeling positive about the group’s prospects going forward.

Hutan Melintang factory visit. Approximately 30% of QL’s surimi products are exported with the largest markets being to the USA. Other large markets include Indonesia and China, where QL supplies certain fish balls to popular hot pot chain HaiDiLao (only in Xi An) amongst others. Additionally, of the surimi snacks produced, 60% are exported, particularly to Korea and Japan, where the snacks are typically consumed alongside alcoholic beverages.

Marine Processing Manufacturing (MPM). QL shared that they plan on expanding food production capacity by (i) increasing garoupa fish aquaculture capacity from 3 tonnes to 30 tonnes; (ii) increase deep sea fishing fleet in Endau from 27 boats to 30 boats within the next 2 years; and (iii) increase aquaculture production capacity from 2000MT/year to 6000MT/year within the next 4 years. We are positive on QL’s aquaculture expansion as it reduces its dependency on fish landings, which is greatly affected by weather conditions.

Integrated Livestock Farming (ILF). In order to ride on the growth in overall income and consumption in Indonesia and Vietnam, QL plans to increase egg production capacities from 750k to 900k in Indonesia and 750k to 1,800k in Vietnam by 2023. Note that egg consumption in Indonesia (60 in 2011 to 90 eggs per person p.a. currently) and Vietnam (60 in 2009 to 120 eggs per person p.a. currently) are growing quickly, despite lagging far behind Malaysia. On average, Malaysians consume 300 eggs per year.

Family Mart venture. Since the opening of the first Family Mart in Nov 2016, QL has opened 90 outlets as of end-Mar 2019. QL targets to open 300 outlets by FY22. We are very positive on the group’s venture into the convenience store business as the profitability of stores has far exceeded our expectations due to (i) higher average ticket amount of over RM10 (vs less than RM6 for its rivals); (ii) higher average customer count; and (iii) skewed sales mix toward fresh food. We expect Family Mart to achieve economies of scale sooner-than-expected and break even by mid-FY20 with an estimated store count of 110. For the time being, QL intends to only open stores in Klang Valley, Johor, Ipoh and Malacca. QL does not intend to expand to Penang for the time being. QL shared that the capex requirements for each store averages RM400k.

Forecast. As the visit yielded no surprises, we keep forecasts unchanged.

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. Our TP of RM6.00 (based on 40x FY20 EPS of 15.1 Sen Pegged to +1SD Above Its Five Year Average) And SELL call Remain Unchanged.

Source: Hong Leong Investment Bank Research - 22 Apr 2019