News  In an announcement to Bursa Malaysia, QL Resources’ 39%-owned associate company, Lay Hong Berhad proposed to undertake a private placement of up to 15.8m new shares or 30% of the enlarged share capital.

 The move could raise up to RM49m for Lay Hong, which is expected to be utilized as working capital within 12 months.

Comments  Neutral to QL. Assuming maximum new issuance of 15.8m shares, the enlarged share base post-placement of 68.3m shares could potentially dilute QL’s stake to 28.8% from 39% currently. Thus, profit recognition from associate level is estimated to be lower at RM4.9m from RM6.6m, which in turn will only cause a minor 0.9% decline in QL’s FY15E net profit of RM189.9m.

 Timely placement for Lay Hong? The private placement exercise could provide extra shares liquidity to Lay Hong in order to comply with the 25% threshold of public shareholding spread required by Bursa Malaysia (current free floating at 2.2%). Moreover, the RM49m proceed to be used as working capital would help alleviate its high net gearing level of 1.04x as of 2Q15.

Outlook  Nonetheless, we expect QL to hold further negotiation with Lay Hong to request for seat in the latter’s board in order to safeguard its interest in the associate company which was the main rationale that prompted the failed attempt of takeover back in September 2014.

Forecast  No changes to earnings forecasts, as dilution in stake would only result in minor earnings decline. Rating Maintain OUTPERFORM Valuation  Maintain our TP of RM3.86, based on 22.7x PER CY15, which implies +1.5 SD over 5-year mean PER)

Risks to Our Call  Lower-than-expected CPO prices.

 Global economic and climatic uncertainties

Source: Kenanga