What’s New

• 3QFY17 earnings came in line with expectations

• Earnings from palm oil activities improved on increased maturity profile

• Integrated livestock farming dragged by disease outbreak in Indonesian operations

• FamilyMart venture is on-track

• Maintain HOLD

Volume, capacity expansion the next step. QL’s core staple food businesses will likely remain resilient despite expectations of a slowdown in Malaysia’s private consumption and economic growth. Hence, to boost near-term growth, QL plans to ramp up its regional feedmill production, aquaculture (prawn farming) project, and the volume of frozen surimi-based products plus snack foods for export. Although we continue to like QL for its diversified business model, we believe near-term growth initiatives are priced in and unlocking the long-term earnings potential of its expansion plans is a key re-rating catalyst.

FamilyMart venture to offer long-term synergies. FamilyMart – QL’s venture with Japan’s FamilyMart Co. Ltd – targets to open 300 stores in five years. Currently, four stores had been opened with eight more in 2017. The intention to focus on ready-to-eat F&B will bring synergies to QL’s surimi-based products, snack foods, and processed poultry product businesses. However, the earnings impact in the near term is negligible given the prerequisite 2-3 years’ gestation period. In the mid to long term, positive accretion from this venture will depend a lot on FamilyMart’s ability to differentiate itself from its competitors such as 7-11 Malaysia and Bison.

Special dividend. QL announced a special dividend of 3 sen/share, coupled with proposed bonus issue on the basis of three bonus shares for every ten existing ordinary shares held in QL. Free operating cash flow for FY17F stands at 4 sen/share.

Valuation

Our DCF-derived TP is RM4.60 (8.0% WACC, 5% TG), and implies 24x FY17F (ending March) PE.

Key Risks to Our View

Severe price volatility is a threat to commodity-intensive sectors like poultry. Prolonged weak product prices or high feed costs may hurt earnings, though QL’s integrated and diversified structure implies less earnings fluctuations than its peers.

Source: Alliance Research - 1 Mar 2017