We recently visited QL Resource (QL)’s marine products manufacturing (MPM) plant at Hutan Melintang, Perak and came back feeling optimistic about its long-term prospects which are driven by: (i) steady MPM plant expansion which should support long-term growth, (ii) good growth potential for integrated livestock farming (ILF) segment in international markets, and (iii) bullish plantation outlook. We maintain our OUTPERFORM call on QL and Target Price of RM3.51 based on an unchanged 20.6x Fwd. PER valuation.

Hutan Melintang plant to strengthen MPM division. QL recently expanded its surimi-based production capacity by 15k MT in Dec-2013. This is expected to result in 11% increase in total MPM segment production to 150k MT (including deep-sea fishing operations). By itself, the Hutan Melintang plant makes up about 45% of QL’s overall MPM segment capacity. Other MPM plants are located at Endau (Johor), Johor Bahru (Johor), Tuaran (Sabah), Surabaya (Indonesia) and Zhongshan (China).

Historically, MPM is the main profit contributor for QL. The MPM segment contributed RM619m or 25% of FY14 revenue. Additionally, MPM contributed RM109m or 54% of group PBT. We are optimistic after our visit to Hutan Melintang as the expansion should be positive to group earnings, given solid margins seen in this segment. Note that MPM division margins are historically the highest among the segments (between 14% and 18% in the last 5 years).

Still growing. Besides the 15k additional capacity completed in Dec-2013, the Group is still expanding its Hutan Melintang production line for fishcake and other surimi-based products. Furthermore, a new dry snack foods plant is in the works, targeted for completion by Dec-2014. To be on the conservative side, we have yet to factor in the expansion, but we may consider upgrading our earnings over time, pending further updates from management.

Room to grow in ILF and POA divisions too. Besides the growth prospect seen in MPM division, we are positive on ILF and palm oil activities (POA) divisions as well. For ILF division, we expect to see sales growth driven by better overseas demand for QL’s higher-grade branded eggs as living standards in Indonesia and Vietnam improves. Note that the average egg consumption for a Malaysian is 300 eggs a year; compared to only 80 for Indonesians and 60 for Vietnamese. POA segment outlook is also good as we expect double digit FFB growth due to its young average age profile of 4–7 years old. Our plantation analyst is also bullish on the sector and expects CPO prices to be higher in CY2014 at RM2,800/MT (+14% YoY).

Reiterate OUTPERFORM rating with TP maintained at RM3.51. Our target price is based on an unchanged target PER of 20.6x on CY15E EPS of 17.0 sen. The current TP implies a total return of 10.7% (9.3% upside and 1.4% dividend yield). The 20.6x Fwd PER is based on +1.0SD over 3-year historical Forward PER which we believe is justified by QL’s solid expansion pipeline, resilient diversified business segments and history of delivering consistent earnings growth over the last 15 years.

Source: Kenanga