Since the opening of the first Family Mart approximately three years ago, we understand the venture has already turned profitable. We are very positive on this finding given that QL initially expected the venture to take seven years to reach profitability. We keep forecasts unchanged. Despite being a consumer staple, we expect uncertainty surrounding Covid-19 to keep QL’s share price subdued, particularly given the expensive valuations the stock trades at. Maintain HOLD and TP of RM8.20 based on unchanged 50x FY21 earnings.

Family Mart a smashing success. Family Mart currently has 180 operational outlets. While this is significantly lesser than its competitors such as 7-Eleven, MyNews and KK Mart, we estimate the profitability per outlet is significantly higher (Figure #1). We attribute this to (i) higher average ticket amount; (ii) higher average customer count; and (iii) skewed sales mix toward fresh food, which is a higher margin product. Since the opening of the first Family Mart approximately three years ago, we understan d the venture has already turned profitable. We are very positive on this finding given that QL initially expected the venture to take seven years to reach profitability. We see similarities between current day QL and Charoen Pokphand Foods (CP) (Thailand) which initially brought the 7-Eleven franchise to Thailand in 1989 before listing the company under the name CP All in 2003. In 2019, CP All’s sales of RM73bn eclipsed CP’s total sales of RM71bn.

Strong growth in ILF division. 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 experience income growths (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 are still rooms 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).

Entry into FBMKLCI to spell another rerating? QL is currently the 30th largest listed company by market cap (Figure #2). Note that QL will become eligible to be included in the FBMKLCI should it enter the top 25 or existing members fall below the 35thposition or lower. We note that in late-FY17 when news broke that Nestle was to be included in the FBMKLCI, Nestle’s forward PE rose from ~30x to ~45x. Should QL be included in the FBMKLCI, we reckon QL could see a re-rating similar to Nestle. The FBMKLCI is reviewed semi-annually, with the next review is scheduled to occur in June 2020.

Forecast. Unchanged.

Maintain HOLD. Despite being a consumer staple, we expect uncertainty surrounding Covid-19 to keep QL’s share price subdued, particularly given the expensive valuations the stock trades at, which is perhaps a reflection of management’s strong execution capability. Maintain HOLD and TP of RM8.20 based on unchanged 50x FY21 earnings.

Source: Hong Leong Investment Bank Research - 2 Apr 2020