We met with QL management and came away feeling positive on the group’s prospects going forward. Forecasts remain unchanged. We raise our TP from RM6.56 to RM8.20 based on a higher PE multiple of 50x (+1SD above its 5 year average PE) from 40x previously. While we understand 50x PE may appear to be a rich valuation, given the size of QL, growth prospects and lack of alternative investment options of this magnitude in the consumer sector, we feel this is justified.

We met with QL management and came away feeling positive on the group’s prospects going forward.

Integrated Livestock Farming (ILF). QL intends to increase egg production capacities in Indonesia (to 1.4m from 0.85m) and Vietnam (to 1.8m from 0.85m) over the next four years. We expect egg consumptions in Indonesia and Vietnam continue to increase as both countries become increasingly wealthy (egg consumption in Indonesia increased from 60 eggs per person p.a. in 2011 to 90 currently). Note that in Malaysia, egg consumption tops 300 per person p.a. currently. We are positive on these growth ventures as we are confident there is still room for growth in consumption for Indonesia and Vietnam. As QL is already a large poultry player, we see little execution risk in these ventures. Note that currently, QL already produce approximately 5.7m eggs per day (4m of these in Malaysia).

Marine Processing Manufacturing (MPM). QL’s fish ball and surimi processing remain dependent on weather conditions, which effect volume of fish catches. In order to mitigate this risk, QL have ventured into aquaculture production (which involves farming of fish, prawns etc. under controlled conditions). QL intends to increase production capacity from 2,000MT currently to 6,000MT p.a. in the next four years. We understand aquaculture products are sold to Australia, China and Japan markets.

Palm Oil Activities (POA). Surging CPO price bodes well for QL’s plantation division. CPO price surged 45% since mid-2019 to ~RM2,850/mt currently. HLIB expects CPO to average RM2,550/mt in FY20 (+13.5% YoY). QL’s plantation division is well positioned to take advantage of the high price, as 85% of their planted trees are in their prime fruiting age.

Family Mart venture. QL currently has ~170 operational outlets, with plans to open a further 80 stores in FY20. We expect new outlets in Klang Valley and sub-urban areas in addition to further locations in Johor Bahru, Melaka and Negeri Sembilan. They intend to have 300 operational 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; (ii) higher average customer count; and (iii) skewed sales mix toward fresh food. QL shared that the capex requirement for each store averages RM400k. We are very positive on the group’s Family Mart venture as our internal calculations indicate Family Mart has already turned profitable in under 3 years, which was previously expected to take 7 years.

Forecast. Unchanged.

Upgrade to HOLD. We like QL for its diversified revenue streams, seasoned management team and decent growth prospects. We raise our TP from RM6.56 to

RM8.20 based on a higher PE multiple of 50x (+1SD above its 5 year average PE) from 40x previously. While we understand 50x PE may appear to be a rich valuation, given the size of QL, growth prospects highlighted above and lack of alternative investment options of this magnitude in the consumer sector, we feel this is justified.

Source: Hong Leong Investment Bank Research - 4 Feb 2020