News  Proposed disposal of sub-parcels of leasehold land (1.604 hectares or 172,653sq.ft) in Inanam Industrial Belt area in Kota Kinabalu by its wholly owned subsidiary, QL KK Properties Sdn. Bhd. ("QLKK"), to a related party namely, Leisure Junction Sdn. Bhd. (owned by Ruby Technique whose holdings company is CBG Holdings Sdn Bhd, which is also a major shareholder of QL Resources) for a total consideration of RM18.5m.

Comments  The disposal of 1.6 hectares land is part of two parcel lands in Tuaran, Sabah with an aggregate size of 5.6 hectares.

 The disposal is mainly to realize the gains of the unutilized land and utilising the proceeds for the construction cost for its remaining lots, which are mainly used by its Marine operations. Hence, this sale comes in line with its strategic review to divest the non-core and non-income generating assets as mentioned in our earlier report dated 27 March 2013.

 This land is being offered at RM107psf, which we deemed as fair given that there are land sellers currently asking for RM65psf, which is 39.3% lower than the said land sale. (Note that the difference could be due to variations in land use, terms, title, etc.).

 The proposed disposal is expected to be completed within three months from the date of S&P. As QL Resources has three months left into FY15, we have factored in a RM7.9m one-off gain to FY15 based on the total investment cost of RM10.5m. Hence, our FY15E net profit is increased marginally by 3.0% from RM190.2m to RM195.9m. As the total amount of gains is relatively small as opposed its earnings, we do not expect any material impact to the balance sheet. Net gearing is expected to remain at 0.2x (post-bonus & right issue).

Outlook  We have a neutral-to-positive stance on QL given: (i) the continuous improvement in both MPM and ILF results with MPM margins sustaining above the 5-year average of 14% in the recent quarters while ILF margins have been improving nearer to the average margin of 7.8% in 2Q14 and (ii) that basic food items will be GST zero-rated, making QL Resources a potential beneficiary.

Forecast  We are maintaining our FY14E NP. However, we revised up our FY15E NP marginally to RM195.9m due to the one-off gains.

Rating Upgraded to OUTPERFORM, as the share price has retraced and it offers better upside potential.

Valuation  TP is maintained at RM4.62 (or RM3.32 on an ex-all basis) based on an unchanged FY15 PER of 20.2x.

Risks  The global economic and climate uncertainties.

Source: Kenanga