News

QL announced to Bursa Malaysia that it has, through its wholly owned subsidiary Maxincome Resources Sdn Bhd, signed an area franchise agreement with FamilyMart Co. Ltd. of Japan to develop and operate FamilyMart convenience stores in Malaysia for 20 years.

QL expects to open the first FamilyMart in Malaysia by December 2016 and targets 300 stores in Malaysia in five years.

Comments

We were surprised but neutral on its venture into the convenience store business. The Group views modernisation and urbanization as the favourable factors for the convenience stores to prosper, while the business also provides a strategic downstream expansion of QL’s existing food manufacturing and distribution business.

However, we are wary of the competitive and challenging business landscape as the top two largest competitors are currently operating 1,944 stores and 247 stores, respectively, and have lined up aggressive expansion plan to consolidate market share. Thus, we believe strong efforts are required from the Group as a newcomer to penetrate and grab market share in the convenience store industry.

As for the financial impact, the Group expects the new business to have long gestation periods and minimal contribution to FY17 earnings. For illustration purpose, 300 stores openings in 5 years or 60 stores per year would cost QL a capex of RM15m assuming capex per store of RM250k. We do not think it would be a major issue to QL considering its net gearing of 0.3x as of 3Q16 and book value of RM1.6b.

Outlook

Earnings growth is expected to be healthy at 10.6% and 8.9% over the next two years, underpinned by the defensive nature of its staple food products, which are less vulnerable to the weak consumer sentiment.

Forecast

We made no changes to our earnings forecast to be in line with management’s guidance.

Rating

Maintain UNDERPERFORM

Valuation

No changes to our Target Price of RM4.16 based on unchanged 23x FY17E PER, which is close to +1 SD over 5-year mean.

Although we like the company for its proven earnings track record and resilient nature, we think that the valuation (24.5x PER FY17E, close to +1.5 SD over 5-year mean) appears lofty.

Risks

Lower-than-expected egg prices

Higher-than-expected production costs

Source: Kenanga Research - 12 Apr 2016