QL participated in our recent RHB-OSK DMG Asean Hong Kong Corporate Day (ACD) in  Singapore.  We  gather  from  management  that  2013  will  be  a  good  year  for  the group's  marine  division,  buoyed  by  its  regional  expansion  while  the  near-term performance  of  its  integrated  livestock  farming  (ILF)  and  palm  oil  activities  (POA) segments should be dampened by the volatility in commodity prices. We expect the aggressive  expansion  in  QL's marine  production,  integrated  poultry  and  palm  oil divisions in Indonesia to propel earnings. Maintain BUY, with a revised FV of RM3.52.  
 
Marine  segment  the  growth  fuel.  QL  has  the  capacity  to  produce  30k  tonnes  of  surimi currently, of which 25k tonnes comes from Malaysia and 5k tonnes from its Indonesia unit in Surabaya. Recent expansion at the Surabaya marine products plant will boost its annual capacity  in  Indonesia  from  5k  to  10k  tonnes.  The  group  is  also  eyeing  opportunities  to acquire  some  local  and  regional  surimi  and  surimi-based  manufacturers  to  scale  up  this lucrative  business.  Recently,  it  invested  in  prawn aquaculture  in  Kudat  in  Sabah,  which should  take  off  by  March  2014.  Amid  bountiful  fish  supply  and  stable  demand  for  marine products, we expect the group's marine segment to deliver better earnings y-o-y.  

ILF, POA hit by falling commodity prices. The group's integrated livestock farming (ILF) division  -  its  main  revenue  contributor  -  has  been  impacted  by  falling  egg  prices  in  the peninsula while the prices of corn and soybean have risen due to the recent drought in the US.  As  a  consequence  of  the  higher  raw  material  cost  and  lower  selling  prices,  ILF margins  have  thinned.  Likewise,  contributions from the group's palm oil activities (POA) segment have weakened due to receding CPO prices.

Maintain  BUY.  The  higher  production cost  arising  from costlier  raw  materials  and  labour costs  prompt  us  to  lower  our  FY13  and  FY14  forecasts  by  11%  and  13.7%  respectively. We  expect  the  group's upcoming  results  to  come  in  flat  as  the  weaker  showing  from  the ILF and POA divisions should be partially offset by the stronger marine division. Given the recent  recovery  in  egg prices and  as the group's plantations  in  Indonesia  reach maturity, we expect QL's results to improve from 4QFY13. Maintain BUY, with our FV nudged down to RM3.52, based on 19X CY13 EPS.

Marine  products  manufacturing  (MPM).  On the home front, the group is building a new frozen  surimi-based  factory  with  an  annual  capacity  of  15k  tonnes  in  Hutan  Melintang, Perak, which will be completed by mid-2013. Also in the pipeline is a new frozen fish cold room with an annual capacity of 2k tonnes in Endau, Johor, which is slated to be opened by 1QFY14.

Integrated  livestock  farming  (ILF).  QL  aims  to  ramp  up  egg  production  at  its  integrated livestock farm in Indonesia from 450k eggs per day (epd) currently to 900k by March 2013, as well as increase the number of day-old chicks (docs) from 1.3m per month to 2.5m docs monthly.  Meanwhile, its new feedmill in Indonesia - which will boast of a monthly capacity of  20k  tonnes  -  is  slated  to  be  ready  by  April  2014.  In  view  of  recovering  egg  prices  in Peninsular  Malaysia  and  Indonesia  along  with  stabilising  raw  feed  material  prices,  the group's ILF division should pick up pace in the near future.

Palm  oil  activities  (POA). Currently, QL has 1.2k ha  of mature plantations in Sabah and 20k  ha  under  development  in  East  Kalimantan  in  Indonesia.  Elsewhere,  we  expect  the contribution from its associate, Boilermech, to go up from FY14 onwards after QL raised its equity  stake  in  the  former  from  35%  to  40%.  Moving  forward,  POA  segment's growth catalyst  will  mainly  be  its  maturing  Indonesian  plantations  and  a  potential  JV  with  other CPO millers on a palm pelletisation project

Source: OSK