We recently visited QL Resources’ (QL) surimi-based products plant in Hutan Melintang. We expect the MPM segment to stage a recovery, owing to better fish catch and higher contribution of surimi-based products arising from the ramp-up in the new plants. We also are turning more upbeat on the Family Mart operations, as the solid execution and positive customer response should continue to support stellar performance in the long term. Premised on this we are upgrading QL to a BUY with a revised DCF-derived TP of RM8.00.

Recent Visit to Hutan Melintang Plant

We recently paid a visit to QL’s Hutan Melintang plant, which houses the surimi, chilled and frozen surimi-based products and fish snacks operations. We also got a closer look at the newly completed and more efficient chilled and frozen surimi-based product plants, which will cater to the growing demand especially in the export market.

Marine Product Manufacturing (MPM) Segment Recovery

In addition to the increased capacity, gradual recovery in fish catch after a low cycle should provide steady earnings growth in FY19. We also flag the potential for margin expansion from improving product mix, with higher valued products such as surimi-based products, deep-sea fishing and aquaculture contributing more to MPM revenue. In the near term, any weakening of the RM against US$ is positive for MPM margins as exports account for more than 60% of MPM segment turnover.

Turning More Upbeat on Family Mart

We believe Family Mart remains an attractive platform for vertical integration and growth for QL in long term. We forecast that QL is on track to hit 90 stores by end of FY19 and its target of 300 stores by FY22, and have a lot of room for growth judging by the saturation rate of convenience stores in Malaysia compared to other countries. We believe this is testament to their innovative product launches, which appeal very well to customers.

Upgrade to BUY With a Higher DCF-based TP of RM8.00

We have kept our FY19 forecasts relatively unchanged, but tweak our forecasts for FY20 onwards to reflect much stronger growth in store count and average ticket size for the Family Mart operations, supported by steady regional expansion in their other segments. Premised on our long term upwards revision in our forecasts, we upgrade QL to a BUY with a revised DCF-derived TP of RM8.00.

Source: Affin Hwang Research - 17 Oct 2018