Upcoming Development

Below lists the upcoming development where projects are in plan or already been executed. This provides a clear picture of where to expect revenue growth would come from.

Valuations

Trading at PE of 28 which is well above the industry average of a tat less than 20 for consumer products, I believe the valuations are over on the expensive side and indeed we are buying at a premium versus other counters which are possibly undervalued.

Unlike international brands like Nestle or Dutch Lady, the premium that one pays shouldn’t be higher than those major brands. CP Food in Thailand is only demanding a PE of 17, so why are we paying so much premium for this stock?

The discovery process of this stock happened this way. Looking at most counters which went on a major correction after the FBMKLCI dropped more than 100 points from the 1700s range, there weren’t any major correction for QL Resources. This increased my curiosity and started just simply reading the development ahead in the annual report.

Much to my amazement, the market is right once again for not following the sell-off like the broad market. The list of upcoming projects that are already in progress and some in the midst of planning are convincing enough that this company is set for a robust growth ahead.

This is where scale comes in where it had found its secret of success and plans to replicate it quickly covering more places in Malaysia and spreading the business to Indonesia and Vietnam. Already proven with the industry know how, the business finds its easy to repeat such success in the coming years.

Below is an estimate of revenue and earnings in years to come.

With known operations ahead, the growth for earnings was estimated to add around RM 194.47 million. That brings the EPS to 30.97 cents per share for FY2020 holding all variables constant. Knowing the value of the EPS, it meant that we can estimate that we are actually paying a forward PE of 14 times earnings which I have no problems with.

In fact, the estimation did not factor in inflation on food prices 4 years from now and the potential plans of acquisition or upcoming projects that might complete before 2019 ends. There are still a lot of re-rating possibilities for this company but in the meantime, praying for no disruption to the well-being of the company’s biological asset would bring us to the estimated EPS growth which is set to double by 2020.

Cash Flow & Balance Sheet Strength

The cash flow generated over these years had increased at a CAGR of 10.41% over the last 5 years. That brings the cash balance for the company amounting to almost RM250 million which is plenty of liquidity for CAPEX benefits ahead.

The company had started to reduce its debt to equity levels below the 50% level which is a good sign for the long term. Debt reduction allows lower cost and higher positive cash flow in the future as well as opening up more opportunities for investment or acquisition.

There isn’t any major concern on items listed on the balance sheet and do not require further questioning on absurd valuations for its assets. The equity value based on its balance sheet was reported to be RM1.6 billion or 3.42 times book value. Again, over on the expensive side but not a concern if revenue estimate holds.

I know there are cheaper consumer stocks out there but the potential and growth abilities that it already shown in previous years could be replicated on a larger scale entering overseas markets.

Rather than investing in a company with cheap valuations without plans to invest more into the business, picking one which appear to have a robust revenue growth laid out seems to be a better choice.

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