We met with QL recently and came away feeling neutral on the group’s prospects going forward. QL’s ESG initiatives would not only result in better QL being an ESG leader, but also open up the stock to a wider investor base through the potential inclusion in the FTSE4Good Index as well as funds dedicated to investing in ESG-centric companies. As the meeting yielded no surprises, we keep our forecasts unchanged. We maintain our HOLD call and TP of RM5.88 pegged to 50x FY22 earnings.

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

Integrated Livestock Farming (ILF). To recap, egg prices in Peninsular Malaysia trended down sharply in 1HFY21 due to drop in demand from (i) reduced export to Singapore; and (ii) lower domestic consumption from impacts on various MCO restrictions (QL shared that foreign workers returning home contributed to lower egg consumption as they consume a disproportionately high amount of eggs). We note that this downtrend in prices have resulted in industry-wide cuts in production which helped stabilise prices in the later end of CY20. With regards to QL’s expansion into Vietnam, note that Vietnam had managed to keep the spread of Covid-19 under control (at its peak only reaching 82 cases a day) (Figure #1). As such, QL is on track to achieve its aim of growing egg production to 1.8m per day, with production currently at 1.25m (up from 0.85m since Jan-20).

Family Mart growth on track. Despite recovery of in-store sales since the loosening of CMCO restrictions, we understand sales per store have not reached pre-Covid -19 levels. Encouragingly, Family Mart have partnered with Food Panda to make their products available for delivery. Since opening its first store in late-CY16, Family Mart’s store count has grown to 217 stores as of end-Nov 2020. QL targets to have 244 operational stores by end-FY21 and 300 by end-FY22. While 7-Eleven is still the market leader in terms of number of stores, we note that other players are slowly catching up (Figure #2). While we understand that CVS players continue to be in expansionary mode (eg. MyNews plan to open 500 CU outlets in the next 5 years), we reckon the local market is still very underserved, with the number of modern CVS per million people far lagging behind other Asian countries (Figure #3).

Effects of ESG Initiatives. ESG initiatives remain the group’s focus. With these initiatives, QL aims to eventually be included in the FTSE4Good Index, which is a series of ethical indices, based on a range of corporate social responsibility criteria. Inclusion in the FTSE4Good Index would not only solidify QL’s status as an ESG-leader in Malaysia, but also open up QL to a larger investor base, namely (i) index funds tracking the FTSE4Good Index; and (ii) asset management funds dedicated to investing in ESGcentric companies.

Increasing use of ‘green energy’. QL will attempt to reduce greenhouse gas (GHG) emissions from their MPM division by spending RM20m on 8MW solar energy for their MPM production facility in FY21. Furthermore, QL’s Palm Oil Activities (POA) already have an operational biogas plant in their palm oil mill in Tawau, Sabah which uses by products of the milling process for energy generation, which is in turn sold back to the local grid.

Social Initiatives. QL have a long running interest-free loan scheme available to fishing communities in Perak, Johor and Sabah. This initiative is aimed at providing fisherman capital to build, upgrade and modernise their fishing fleet. Not only does this improve their livelihood, this also helps spur economic activity in these respective regions. To date, QL have provided more than RM100m in interest free financial assistance.

Covid-19 Assistance. In response to the Covid-19 pandemic, QL contributed RM500k for the purpose of purchasing ventilators and oxygen concentrators to ease the burden of hospitals. Furthermore, QL have contributed 15k eggs to students stranded during the MCO period and provided daily essentials to the homeless.

Forecast. Unchanged.

Maintain HOLD. We maintain our HOLD call and TP of RM5.88 pegged to 50x FY22 earnings. While we like QL for its diversified revenue streams, savvy management and growing Family Mart division, we reckon QL is fairly priced at current levels (54.8x forecasted FY21 earnings).

Source: Hong Leong Investment Bank Research - 16 Dec 2020